10-K405
1
FORM 10-K
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1994
Commission File Number 0-10503
CONTINENTAL MORTGAGE AND EQUITY TRUST
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(Exact Name of Registrant as Specified in Its Charter)
California 94-2738844
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
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(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
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(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, no par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to 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 at least the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 17, 1995, the Registrant had 2,918,121 shares of beneficial
interest outstanding. Of the total shares outstanding, 1,651,412 were held by
other than those who may be deemed to be affiliates, for an aggregate value of
$24,771,180 based on the last trade as reported on The Nasdaq Stock Market on
March 17, 1995. The basis of this calculation does not constitute a
determination by the Registrant that all of such persons or entities are
affiliates of the Registrant as defined in Rule 405 of the Securities Act of
1933, as amended.
Documents Incorporated by Reference:
NONE
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INDEX TO
ANNUAL REPORT ON FORM 10-K
Page
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PART I
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Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 24
PART II
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Item 5. Market for Registrant's Shares of Beneficial
Interest and Related Shareholder Matters . . . . . . . . . . . . . . . . . . . . 25
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 28
Item 8. Financial Statements and Supplementary Data.. . . . . . . . . . . . . . . . . . . . 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . 70
PART III
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Item 10. Trustees, Executive Officers and Advisor of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . 86
PART IV
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Item 14. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . 89
Signature Page. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
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PART I
ITEM 1. BUSINESS
Continental Mortgage and Equity Trust (the "Trust" or the "Registrant") is a
California business trust organized pursuant to a declaration of trust dated
August 27, 1980, and amended and restated as of May 27, 1987 (as amended
through the date hereof, the "Declaration of Trust"). The Trust commenced
operations on December 3, 1980. The Trust elected to be treated as a Real
Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended. The Trust has, in the opinion of the Trust's
management, qualified for federal taxation as a REIT for each year subsequent
to December 31, 1980.
The Trust's real estate portfolio at December 31, 1994 consisted of 29
properties held for investment, two equity method real estate partnerships,
(owning 32 industrial warehouse facilities and two office buildings) and 11
properties acquired through foreclosure and held for sale. Eight of the
properties held for investment were purchased during 1994, and two of the
properties held for sale were obtained in 1994 through foreclosure of the
collateral securing mortgage notes receivable. The Trust's mortgage notes
receivable portfolio at December 31, 1994 consisted of 17 mortgage loans. One
of the mortgage loans was created in 1994 in connection with a property sale
and another mortgage loan was acquired in 1994 in conjunction with the
settlement of a profit participation. The Trust's real estate and mortgage
notes receivable portfolios are more fully discussed in ITEM 2. "PROPERTIES."
On September 16, 1985, the Trust's former management announced a plan to
liquidate the Trust within ten years. Shareholders adopted amendments to the
Declaration of Trust ratifying the plan at the 1986 annual meeting of
shareholders. In accordance with such plan and provisions of the Declaration
of Trust, the Trust could no longer make any additional investments in real
estate or mortgage loans. During 1988, management of the Trust was effectively
changed through the election and appointment of new Trustees and through a
change in contractual advisor. After a review of the Trust's portfolio and
existing market conditions, the Trust's new Board of Trustees concluded that
the requirement to liquidate the Trust's assets, coupled with restrictions on
new investments, had failed, and would continue to fail, to maximize either the
current or long-term return to the Trust's shareholders. Therefore, the Trust
sought and received the approval of its shareholders at the 1989 annual meeting
of shareholders to amend the Declaration of Trust to eliminate the liquidation
requirement. Since March 1990, the Trust has been pursuing new investment
opportunities and has been actively engaged in real estate acquisitions and to
a lesser extent, the origination and acquisition of mortgage loans. The Trust
also continues making selective dispositions of certain of its assets. As part
of the Olive litigation settlement described in Item 3. "LEGAL PROCEEDINGS -
Olive Litigation", the Trust resubmitted the question of liquidation to
shareholders at the Trust's annual meeting of shareholders held on March 17,
1992. The Trust's shareholders ratified their prior vote to eliminate the
liquidation requirement.
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ITEM 1. BUSINESS (Continued)
Business Plan and Investment Policy
The Trust's primary business and only industry segment is investing in equity
interests in real estate through direct acquisitions, partnerships and
financing real estate and real estate related activities through investments in
mortgage loans, including first, wraparound and junior mortgage loans. The
Trust's real estate is located throughout the continental United States.
Information regarding the real estate and mortgage notes receivable portfolios
of the Trust is set forth in ITEM 2. "PROPERTIES" and in Schedules III and IV
to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA".
The Trust's business is not seasonal. The Trust has determined to pursue a
balanced investment policy, seeking both current income and capital
appreciation. With respect to new investments, the Trust's plan of operation
is to continue to make equity investments in real estate and to continue its
program of investing in capital improvements and emphasizing high maintenance
standards with respect to its existing real estate portfolio. The Trust has
determined that it will no longer seek to fund or purchase mortgage loans other
than those which it may originate in conjunction with providing purchase money
financing of a property sale. The Trust does intend however, to service and
hold for investment the mortgage notes currently in its portfolio. The Trust
also intends to pursue its rights vigorously with respect to mortgage notes
that are in default.
The type of new real estate investments made by the Trust will depend upon the
availability of suitable real estate investment opportunities. In general, the
Trust intends to be an aggressive and opportunistic investor, continuing its
focus on new leveraged investments in apartments and industrial facilities in
the Southeast and Southwest, where a majority of the Trust's properties are
located and where the Trust's management believes there remains a potential for
rapid appreciation. The Trust will also increase its emphasis on property
sales to take advantage of strengthening real estate markets, selling
stabilized properties that have reached their potential. Further, to obtain
additional funds and lock in current interest rates, mortgage financing will be
sought on all of the Trust's presently unencumbered apartments held for
investment, consisting of four properties as of December 31, 1994 and to
refinance properties which are currently encumbered by mortgage debt that
matures in the next two years.
Management of the Trust
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by Basic Capital Management,
Inc. ("BCM" or the "Advisor"), a contractual advisor under the supervision of
the Trust's Board of Trustees. The duties of the Advisor include, among other
things, locating, investigating, evaluating and recommending real estate and
mortgage note investment and
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ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
sales opportunities as well as financing and refinancing sources for the Trust.
The Advisor also serves as a consultant in connection with the Trust's business
plan and investment policy decisions made by the Trust's Board of Trustees.
BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips served as a Trustee of the Trust until December 31,
1992. Mr. Phillips also served as a director of BCM until December 22, 1989
and as Chief Executive Officer of BCM until September 1, 1992. Mr. Phillips
serves as a representative of his children's trust which owns BCM and, in such
capacity, has substantial contact with the management of BCM and input with
respect to its performance of advisory services to the Trust. BCM is more
fully described in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor".
BCM has been providing advisory services to the Trust since March 28, 1989.
Renewal of BCM's advisory agreement with the Trust was approved at the annual
meeting of the Trust's shareholders held on March 7, 1995. BCM also serves as
advisor to Income Opportunity Realty Trust ("IORT") and Transcontinental
Realty Investors, Inc. ("TCI"). The Trustees of the Trust are also directors
or trustees of IORT and TCI and the officers of the Trust are also officers of
IORT and TCI. Mr. Phillips is a general partner of Syntek Asset Management,
L.P. ("SAMLP"), the general partner of National Realty, L.P. ("NRLP") and
National Operating, L.P. ("NOLP"), the operating partnership of NRLP. BCM
performs certain administrative functions for NRLP and NOLP on a
cost-reimbursement basis. BCM also serves as advisor to American Realty Trust,
Inc. ("ART"). Mr. Phillips served as a director and Chairman of the Board of
ART until November 16, 1992. Oscar W. Cashwell, President of the Trust, also
serves as the President of BCM, IORT, TCI, as a director of ART and as the
President and director of Syntek Asset Management, Inc. ("SAMI"), which is the
managing general partner of SAMLP. The officers of the Trust, other than Mr.
Cashwell, are also officers of ART. As of March 17, 1995, ART and BCM owned
approximately 35% and 8%, respectively, of the Trust's outstanding shares of
beneficial interest and BCM and the Trust owned approximately 41% and 7%,
respectively, of ART's outstanding shares of common stock.
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel Realty Services, Ltd. ("Carmel,
Ltd.") provides such property management services. Carmel, Ltd. subcontracts
with other entities for the provision of the property-level management services
to the Trust. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr.
Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the
benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of nine of the Trust's commercial
properties and the industrial warehouse facilities owned by a real estate
partnership in which the Trust is a partner to Carmel Realty, Inc. ("Carmel
Realty"), which is a company owned by SWI. Carmel Realty is entitled to
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ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
receive property and construction management fees and leasing commissions in
accordance with the terms of its property- level management agreement with
Carmel, Ltd.
Carmel Realty is also entitled to receive real estate brokerage commissions in
accordance with the terms of a nonexclusive brokerage agreement as discussed in
ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT - The
Advisor."
The Trust has no employees. Employees of the Advisor render services to the
Trust.
Competition
The real estate business is highly competitive and the Trust competes with
numerous entities engaged in real estate activities (including certain entities
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Related
Party Transactions"), some of which may have greater financial resources than
those of the Trust. The Trust's management believes that success against such
competition is dependent upon the geographic location of the property, the
performance of property managers in areas such as marketing, collection and the
ability to control operating expenses, the amount of new construction in the
area and the maintenance and appearance of the property. Additional
competitive factors with respect to commercial and industrial properties are
the ease of access to the property, the adequacy of related facilities, such as
parking, and sensitivity to market conditions in setting rent levels. With
respect to apartments, competition is also based upon the design and mix of the
units and the ability to provide a community atmosphere for the tenants. The
Trust's management believes that general economic circumstances and trends and
new or renovated properties in the vicinity of each of the Trust's properties
are also competitive factors.
To the extent that the Trust seeks to sell any of its properties, the sales
prices for such properties may be affected by competition from other real
estate entities also attempting to sell their properties and governmental
agencies and financial institutions, whose assets are located in areas in which
the Trust's properties are located, and are seeking to liquidate foreclosed
properties.
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Related Party Transactions", certain of the officers and
Trustees of the Trust also serve as officers and directors or trustees of
certain other entities, each of which is also advised by BCM, and each of which
has business objectives similar to the Trust's. The Trust's Trustees, officers
and Advisor owe fiduciary duties to such other entities as well as to the Trust
under applicable law. In determining to which entity a particular investment
opportunity will be allocated, the officers, trustees or directors and the
Advisor consider the respective investment objectives of each such entity and
the appropriateness of a particular investment in light of each such
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ITEM 1. BUSINESS (Continued)
Competition (Continued)
entity's existing real estate and mortgage notes receivable portfolios. To the
extent that any particular investment opportunity is appropriate to more than
one of such entities, such investment opportunity will be allocated to the
entity which has had uninvested funds for the longest period of time or, if
appropriate, the investment may be shared among all or some of such entities.
In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships", the Trust also competes with
other entities which are affiliates of the Advisor and which may have
investment objectives similar to the Trust's and that may compete with the
Trust in purchasing, selling, leasing and financing real estate and real estate
related investments. In resolving any potential conflicts of interest which
may arise, the Advisor has informed the Trust that it intends to continue to
exercise its best judgment as to what is fair and reasonable under the
circumstances in accordance with applicable law.
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to all the risks incident to ownership and financing of
real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks include, but are not
limited to, changes in general or local economic conditions, changes in
interest rates and the availability of permanent mortgage financing which may
render the acquisition, sale or refinancing of a property difficult or
unattractive and which may make debt service burdensome, changes in real estate
and zoning laws, increases in real estate taxes, federal or local economic or
rent controls, floods, earthquakes and other acts of God and other factors
beyond the control of the Trust's management or Advisor. The illiquidity of
real estate investments generally may impair the ability of the Trust to
respond promptly to changing circumstances. The Trust's management believes
that such risks are partially mitigated by the diversification by geographic
region and property type of the Trust's real estate and mortgage notes
receivable portfolios. However, to the extent new property acquisitions and
mortgage lending are concentrated in any particular region, the advantages of
diversification may be mitigated.
ITEM 2. PROPERTIES
The Trust's principal offices are located at 10670 North Central Expressway,
Suite 300, Dallas, Texas 75231. In the opinion of the Trust's management, the
Trust's offices are suitable and adequate for its present operations.
Details of the Trust's real estate and mortgage notes receivable portfolios at
December 31, 1994, are set forth in Schedules III and IV, respectively, to the
Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA". The discussions set
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ITEM 2. PROPERTIES (Continued)
forth below under the headings "Real Estate" and "Mortgage Loans" provide
certain summary information concerning the Trust's real estate and mortgage
notes receivable portfolios.
The Trust's real estate portfolio consists of properties held for investment,
investments in partnerships and properties held for sale. All of the properties
held for sale were obtained through foreclosure of the collateral securing
mortgage notes receivable. The discussion set forth below under the heading
"Real Estate" provides certain summary information concerning the Trust's real
estate and further summary information with respect to the Trust's properties
held for investment, properties held for sale and investments in partnerships.
At December 31, 1994, none of the Trust's properties, partnership investments
or mortgage notes receivable other than Sunset Towers Apartments, exceeded 10%
of the Trust's total assets. At December 31, 1994, 68% of the Trust's assets
consisted of properties held for investment, 11% consisted of properties held
for sale, 8% consisted of investments in partnerships and 4% consisted of
mortgage notes and interest receivable. The remaining 9% of the Trust's assets
were cash, cash equivalents, marketable equity securities and other assets. It
should be noted, however, that the percentage of the Trust's assets invested in
any one category is subject to change and that no assurance can be given that
the composition of the Trust's assets in the future will approximate the
percentages listed above.
The Trust's real estate is geographically diversified. At December 31, 1994,
the Trust held investments in apartments and commercial real estate (office
buildings, industrial facilities and shopping centers) in each of the
geographic regions of the continental United States. However, the Trust's
apartment and commercial properties are concentrated in the Southeast,
Southwest and Midwest regions. At December 31, 1994, the Trust held mortgage
notes receivable secured by real estate located in the Southeast, Southwest and
Midwest regions of the continental United States with a concentration in the
Southeast and Midwest regions, as shown more specifically in the table under
"Mortgage Loans" below.
To continue to qualify for federal taxation as a REIT under the Internal
Revenue Code of 1986, as amended, the Trust is required, among other things, to
hold at least 75% of the value of its total assets in real estate assets,
government securities, cash and cash equivalents at the close of each quarter
of each taxable year.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
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ITEM 2. PROPERTIES (Continued)
Geographic Regions
The Trust has divided the continental United States into the following
geographic regions.
Northeast region comprised of the states of Connecticut, Delaware,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island and Vermont, and the District of Columbia. The Trust has 1
apartment in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The
Trust has 3 apartments and 3 commercial properties in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana,
New Mexico, Oklahoma and Texas. The Trust has 15 apartments and 4
commercial properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, West Virginia and Wisconsin. The Trust has 2 apartments
and 2 commercial properties in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Trust has 3 apartments and 1 commercial
property in this region.
Pacific region comprised of the states of California, Oregon and
Washington. The Trust has 2 apartments in this region.
Real Estate
At December 31, 1994, nearly 90% of the Trust's assets were invested in real
estate. The Trust invests in real estate located throughout the continental
United States, either on a leveraged or nonleveraged basis. The Trust's real
estate portfolio consists of properties held for investment, investments in
partnerships, foreclosed properties held for sale, and investments in the
equity securities of real estate entities.
Types of Real Estate Investments. The Trust's real estate consists of
commercial properties (office buildings, industrial facilities and shopping
centers) and apartments or similar properties having established
income-producing capabilities. In selecting new real estate investments, the
location, age and type of property, gross rentals,
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
lease terms, financial and business standing of tenants, operating expenses,
fixed charges, land values and physical condition are among the factors
considered. The Trust may acquire properties subject to or assume existing
debt and may mortgage, pledge or otherwise obtain financing for its properties.
The Trust's Board of Trustees may alter the types of and criteria for selecting
new real estate investments and for obtaining financing without a vote of
shareholders to the extent such policies are not governed by the Trust's
Declaration of Trust.
As of December 31, 1994, the Trust did not have any properties on which
significant capital improvements were in process.
In the opinion of the Trust's management, the properties owned by the Trust are
adequately covered by insurance.
The following table sets forth the percentages, by property type and geographic
region, of the Trust's real estate (other than unimproved land and a
single-family residence described below) at December 31, 1994.
Commercial
Region Apartments Properties
-------- ---------- ----------
Northeast. . . . . . . . . . . . . . . . 1.7% - %
Southeast. . . . . . . . . . . . . . . . 12.7 37.2
Southwest. . . . . . . . . . . . . . . . 53.3 29.0
Midwest. . . . . . . . . . . . . . . . . 16.5 24.6
Mountain . . . . . . . . . . . . . . . . 6.8 9.2
Pacific. . . . . . . . . . . . . . . . . 9.0 -
----- -----
100.0% 100.0%
The foregoing table is based solely on the number of apartment units and amount
of commercial square footage owned by the Trust and does not reflect the value
of the Trust's investment in each region. The Trust also owns three parcels of
unimproved land, 5 acres located in the Southeast region, 128 acres and 6 acres
in the Southwest region and one single- family residence located in the
Southwest region. See Schedule III to the Consolidated Financial Statements
included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a more
detailed description of the Trust's real estate portfolio.
A summary of the activity in the Trust's owned real estate portfolio during
1994 is as follows:
Owned properties in real estate portfolio
at January 1, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Properties acquired through purchase. . . . . . . . . . . . . . . . . . . . . . 8
Properties obtained through foreclosure of collateral
securing mortgage notes receivable. . . . . . . . . . . . . . . . . . . . . 3
Properties sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
---
Owned properties in real estate portfolio
at December 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Properties Held for Investment. Set forth below are the Trust's properties
held for investment and the monthly rental rate for apartments and the average
annual rental rate for commercial properties and occupancy thereof at December
31, 1994 and 1993:
Rent Per
Square Foot Occupancy
Units/ -------------- --------------
Property Location Square Footage 1994 1993 1994 1993
-------------------- -------------- --------------- ------ ------ ------ ------
Apartments
----------
Applecreek Dallas, TX 216 units/
225,952 sq. ft. $ .48 $ .48 88% 83%
Camelot Largo, FL 120 units/
141,024 sq. ft. .46 .44 98% 97%
Country Crossing Tampa, FL 227 units/
199,952 sq. ft. .48 .46 91% 96%
Edgewood Lansing, IL 353 units/
320,638 sq. ft. .68 .66 94% 93%
El Chapparal San Antonio, TX 190 units/
174,220 sq. ft. .61 .56 93% 100%
Fairways Longview, TX 152 units/
134,176 sq. ft. .48 .37 91% 89%
4242 Cedar Springs Dallas, TX 76 units/
60,600 sq. ft. .71 .71 99% 95%
Fountain Lake Texas City, TX 166 units/
161,220 sq. ft. .50 * 95% *
McCallum Crossing Dallas, TX 322 units/
172,796 sq. ft. .76 * 98% *
Park Avenue IV Clute, TX 108 units/
78,708 sq. ft. .48 * 81% *
Park Lane Dallas, TX 97 units/
87,260 sq. ft. .51 .48 93% 89%
Parkwood Knoll San Bernardino, CA 178 units/
149,802 sq. ft. .61 * 93% *
Pierce Tower Denver, CO 57 units/
45,120 sq. ft. .88 * 98% *
Ravenswood Stratford, NJ 80 units/
57,707 sq. ft. .71 .70 96% 91%
Rivertree Hurst, TX 205 units/
167,522 sq. ft. .47 .46 82% 92%
Somerset Texas City, TX 200 units/
163,368 sq. ft. .52 .49 91% 94%
Southgate Square Roundrock, TX 200 units/
138,436 sq. ft. .70 .59 97% 99%
Stone Oak San Antonio, TX 252 units/
187,686 sq. ft. .55 .51 93% 97%
Sunset Towers San Francisco, CA 243 units/
171,970 sq. ft. 1.48 1.40 97% 96%
The Pines Gainesville, FL 242 units/
294,860 sq. ft. .44 * 96% *
Willow Creek El Paso, TX 112 units/
103,140 sq. ft. .51 * 94% *
Office Buildings
----------------
Genesee Towers Flint, MI 171,114 sq. ft. 12.42 12.52 88% 89%
NASA Office Park Clear Lake, TX 78,159 sq. ft. 9.74 10.68 63% 66%
Tollhill West Dallas, TX 159,546 sq. ft. 11.38 11.48 91% 79%
Windsor Plaza Windcrest, TX 80,522 sq. ft. 9.56 9.01 78% 77%
Industrial Facilities
---------------------
McLeod Commerce Center Orlando, FL 111,115 sq. ft. 6.08 * 73% *
Northgate Distribution Marietta, GA 208,386 sq. ft. 3.70 3.33 100% 76%
Shopping Centers
----------------
Builders Square St. Paul, MN 115,492 sq. ft. 2.65 2.65 100% 100%
Rio Pinar Orlando, FL 113,638 sq. ft. 8.31 8.08 85% 88%
_______________________
* Property was purchased in 1994.
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Occupancy presented above and throughout this ITEM 2. is without reference to
whether leases in effect are at, below or above market rates.
In January 1994, the Trust obtained mortgage financing secured by the
previously unencumbered Park Lane Apartments in Dallas, Texas, in the amount of
$1.3 million. The Trust received net cash of $1.1 million. The remainder of
the financing proceeds were used to fund escrows for replacements and repairs
and to pay various closing costs associated with the financing. The $1.3
million mortgage bears interest at a rate of 8.66% per annum through January
2004 and at a variable rate thereafter and requires monthly payments of
principal and interest, currently $10,000. The note matures in February 2019.
The Trust paid a mortgage brokerage and equity refinancing fee of $4,000 to BCM
based upon the new mortgage of $1.3 million.
In February 1994, the Trust purchased the Fountain Lake Apartments, a 166 unit
apartment complex in Texas City, Texas, for $3.3 million. The Trust paid
$237,000 in cash, assumed an existing mortgage of $2.5 million and the seller
provided additional financing of $402,000. The $2.5 million first mortgage
bears interest at a variable rate, currently 5.9% per annum, requires monthly
payments of principal and interest of $15,000 and matures in November 1998.
The $402,000 seller financing is secured by a second lien mortgage on another
of the Trust's properties, Windsor Plaza Office Building, in Windcrest, Texas.
This mortgage bears interest at a variable rate, currently 6.6% per annum,
requires monthly payments of principal and interest of $3,000 and also matures
in November 1998. The Trust paid a real estate brokerage commission of
$118,000 to Carmel Realty and an acquisition fee of $32,000 to BCM based on the
$3.3 million purchase price of the property.
In March 1994, the Trust purchased the McCallum Crossing Apartments, a 322 unit
apartment complex in Dallas, Texas, for $7.7 million. The Trust paid $1.4
million in cash and the seller provided $6.3 million in mortgage financing.
The mortgage bears interest at rates ranging from 6.5% to 7.5% per annum,
requires monthly payments of interest only through March 1, 1998 and principal
and interest payments of $46,000 thereafter and matures in March 2004. The
Trust paid a real estate brokerage commission of $224,000 to Carmel Realty and
an acquisition fee of $77,000 to BCM based on the $7.7 million purchase price
of the property.
In April 1994, the Trust obtained mortgage financing secured by the previously
unencumbered Southgate Apartments in Roundrock, Texas, in the amount of $3.0
million. The Trust received net cash of $2.9 million. The remainder of the
financing proceeds were used to fund escrows for replacements and repairs and
to pay various closing costs associated with the financing. The $3.0 million
mortgage bears interest at a rate of 9.625% per annum, requires monthly
payments of principal and interest of $26,000 and matures in May 2004. The
Trust paid a mortgage brokerage and equity refinancing fee of $30,000 to BCM
based upon the new mortgage of $3.0 million.
12
13
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In May 1994, the Trust purchased the Willow Creek Apartments, a 112 unit
apartment complex in El Paso, Texas, for $2.3 million in cash. The Trust paid
a real estate brokerage commission of $89,000 to Carmel Realty and an
acquisition fee of $23,000 to BCM based on the $2.3 million purchase price of
the property. In December 1994, the Trust obtained mortgage financing secured
by the property in the amount of $1.8 million. The Trust received net cash of
$1.6 million after the payment of various closing costs associated with the
financing. The $1.8 million mortgage bears interest at a rate of 10.25% per
annum, requires monthly payments of principal and interest of $17,000 and
matures in January 2002. The Trust paid a mortgage brokerage and equity
refinancing fee of $18,000 to BCM based upon the new mortgage of $1.8 million.
Also in May 1994, the Trust obtained mortgage financing secured by the
previously unencumbered 4242 Cedar Springs Apartments in Dallas, Texas, in the
amount of $1.4 million. The Trust received net cash of $1.3 million after the
payment of various closing costs associated with the financing. The $1.4
million mortgage bears interest at a rate of 9.9% per annum, requires monthly
payments of principal and interest of $13,000 and matures in June 2004. The
Trust paid a mortgage brokerage and equity refinancing fee of $14,000 to BCM
based upon the new mortgage of $1.4 million.
In June 1994, the Trust purchased the Park Avenue Apartments, a 108 unit
apartment complex in Clute, Texas, for $855,000 in cash. The Trust paid a real
estate brokerage commission of $34,000 to Carmel Realty and an acquisition fee
of $8,000 to BCM based on the $855,000 purchase price of the property.
In July 1994, the Trust obtained new mortgage financing secured by the Stone
Oak Place Apartments in San Antonio, Texas, in the amount of $3.3 million. The
Trust received net cash of $577,000 after the payoff of $2.5 million in
existing mortgage debt that was scheduled to mature in April 1995. The
remainder of the refinancing proceeds were used to fund escrows for
replacements and repairs and to pay various closing costs associated with the
refinancing. The new $3.3 million mortgage bears interest at a rate of 9.9%
per annum, requires monthly principal and interest payments of $31,000 and
matures in August 2004. The Trust paid a mortgage brokerage and equity
refinancing fee of $33,000 to BCM based upon the new first mortgage financing
of $3.3 million.
In August 1994, the Trust purchased the Parkwood Knoll Apartments, a 178 unit
apartment complex in San Bernardino, California, for $6.4 million. The Trust
paid $1.2 million in cash and assumed the existing mortgage of $5.2 million.
The mortgage bears interest at a rate of 8.0% per annum, requires monthly
payments of principal and interest of $40,000 and matures in February 2004.
The Trust paid a real estate brokerage commission of $197,000 to Carmel Realty
and an acquisition fee of $64,000 to BCM based on the $6.4 million purchase
price of the property.
13
14
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In September 1994, the Trust purchased the Pierce Towers Apartments, a 57 unit
apartment complex in Denver, Colorado, for $2.7 million. The Trust paid
$678,000 in cash and assumed the existing mortgage of $2.0 million. The
mortgage bears interest at a rate of 8.4% per annum, requires monthly payments
of principal and interest of $15,000 and matures in December 2000. The Trust
paid a real estate brokerage commission of $100,000 to Carmel Realty and an
acquisition fee of $27,000 to BCM based on the $2.7 million purchase price of
the property.
Also in September 1994, the Trust purchased the McLeod Commerce Center, a
111,115 square foot industrial facility in Orlando, Florida, for $3.2 million.
The Trust paid $1.0 million in cash and the seller provided mortgage financing
of $2.2 million. The mortgage bears interest at a rate of 9.5% per annum,
requires monthly payments of principal and interest of $19,000 and matures in
October 2001. The Trust paid a real estate brokerage commission of $116,000 to
Carmel Realty and an acquisition fee of $32,000 to BCM based on the $3.2
million purchase price of the property.
In December 1994, the Trust purchased The Pines Apartments, a 242 unit
apartment complex in Gainesville, Florida, for $6.2 million. The Trust paid
$923,000 in cash, assumed the existing mortgage of $2.7 million and the seller
provided additional financing of $2.7 million. The first mortgage bears
interest at 9.6% per annum, requires monthly payments of principal and interest
of $27,000 and matures in July 2011. The $2.7 million second mortgage bears
interest at 9.5% per annum, requires monthly payments of interest only through
September 1995 and monthly payments of principal and interest of $23,000
thereafter, and matures in December 1997. The Trust paid a real estate
brokerage commission of $193,000 to Carmel Realty and an acquisition fee of
$62,000 to BCM based on the $6.2 million purchase price of the property.
In February 1995, the Trust purchased the Sullyfield Commerce Center, a 243,813
square foot industrial facility in Chantilly, Virginia, for $11.0 million. The
Trust paid $2.2 million in cash and the seller provided mortgage financing of
$8.8 million. The mortgage bears interest at a rate of 6% per annum through
December 1996 and 9% per annum thereafter, requires monthly payments of
interest only through January 1999 and principal and interest payments of
$73,000 thereafter and matures in January 2001. The Trust paid a real estate
brokerage commission of $285,000 to Carmel Realty and an acquisition fee of
$110,000 to BCM based on the $11.0 million purchase price of the property.
In February 1995, after determining that further investment in Genesee Towers,
an office building in Flint, Michigan, could not be justified without a
substantial modification of the mortgage debt, the Trust ceased making debt
service payments on the $8.8 million nonrecourse mortgage secured by the
property. The Trust is attempting to negotiate with the lender to modify the
mortgage. However, there can be no assurance that such negotiations will be
successful or that the Trust will continue to own the property. Accordingly,
as of December
14
15
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
31, 1994, the carrying value of the property was written down by $1.2
million, which is included in the 1994 provision for losses, to the amount of
the nonrecourse mortgage.
In March 1995, the Trust purchased the Zane May Warehouses, six industrial
warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for
$5.4 million. The Trust paid $696,000 in cash, obtained new mortgage financing
of $4.6 million and the seller provided additional financing of $403,000. The
$4.6 million mortgage bears interest at a variable rate, currently 9.25% per
annum, requires monthly payments of interest only and matures in July 1999.
The $403,000 of seller financings bear interest at rates ranging from 6% to 8%
per annum, require monthly payments of principal and interest totaling $3,000
and mature in July 1999. The Trust paid a real estate brokerage commission of
$178,000 to Carmel Realty and an acquisition fee of $54,000 to BCM based on the
$5.4 million purchase price.
Partnership Properties. Set forth below are the properties owned by the
partnerships in which the Trust is an equity investee and the average annual
rental rate and occupancy thereof at December 31, 1994 and 1993:
Rent Per
Square Foot Occupancy
--------------- ---------------
Partnership Location Square Footage 1994 1993 1994 1993
----------------- ------------------ ------------------ ------ ------ ------ ------
Sacramento Nine Rancho Cordova, CA 105,249 sq. ft. $ 10.70 $ 10.46 100% 100%
Indcon, L.P. Dallas, TX 424,813 sq. ft. 2.32 2.30 100% 100%
San Antonio, TX 420,522 sq. ft. 2.06 2.00 96% 100%
Atlanta, GA 1,585,419 sq. ft. 2.14 1.92 96% 91%
Memphis, TN 653,852 sq. ft. 2.19 2.04 91% 79%
The Trust, in partnership with National Income Realty Trust ("NIRT"), owns
Sacramento Nine ("SAC 9") which in turn owns two office buildings in the
vicinity of Sacramento, California. The Trust has a 30% general partner
interest in the partnership. The Trust accounts for its investment in the
partnership using the equity method. Until March 1995, Geoffrey C.
Etnire, a Trustee of the Trust, served as a Trustee of NIRT. Until August
1994, Bennett B. Sims and Ted P. Stokely, Trustees of the Trust, also served as
Trustees of NIRT. Until March 31, 1994, BCM served as advisor to NIRT. See
ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The Trust and NIRT are also the partners in Income Special Associates ("ISA"),
a joint venture partnership in which the Trust has a 60% partnership interest.
ISA in turn owns a 100% interest in Indcon, L.P. ("Indcon"), formerly known as
Adams Properties Associates. Indcon owns 32 industrial warehouse facilities.
The Indcon partnership agreement requires consent of both the Trust and NIRT
for any material changes in the operations of the partnership's properties,
including sales, refinancings and changes in property manager. Therefore, the
Trust is a noncontrolling partner and accounts for its investment in Indcon
using the equity method. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
15
16
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In May 1994, Indcon sold one of its industrial warehouses for $4.4 million in
cash. Indcon received net cash of $2.1 million, of which the Trust's equity
share was $1.3 million, after the payoff of an existing mortgage with a
principal balance of $1.8 million and the payment a $133,000 prepayment
penalty. Indcon recognized a gain of $962,000 on the sale, of which the
Trust's equity share was $577,000. Indcon paid a real estate sales commission
of $104,000 to Carmel Realty based upon the $4.4 million sales price of the
property.
Foreclosed Properties Held for Sale. Set forth below are the Trust's
foreclosed properties held for sale (except for a single-family residence) and
monthly rental rate for apartments and the average annual rental rate for
commercial properties and occupancy thereof at December 31, 1994 and 1993:
Rent Per
Foreclosed Square Foot Occupancy
Properties Units/ -------------- --------------
Held for Sale Location Sq. Ft./Acres 1994 1993 1994 1993
-------------------- ------------------ -------------- ------ ------ ------ ------
Apartments
----------
Circletree Waukegan, IL 414 units/
302,640 sq. ft. $ .96 $ * 91% *
Forest Ridge Denton, TX 56 units/
65,480 sq. ft. .53 .64 96% 95%
Quail Oaks Balch Springs, TX 131 units/
72,848 sq. ft. .53 .52 98% 90%
Shadowridge Rocksprings, WY 64 units/
52,700 sq. ft. .57 .56 95% 100%
Woodbridge Westminster, CO 194 units/
104,500 sq. ft. .72 * 79% *
Office Building
---------------
Pinemont Houston, TX 19,685 sq. ft. 9.79 9.77 100% 100%
Industrial Facility
-------------------
Ogden Industrial Ogden, UT 107,112 sq. ft. 2.64 2.55 100% 97%
Land
----
Del Ray Forum Delray Beach, FL 5 acres
Northwest Crossings Houston, TX 6 acres
Round Mountain Austin, TX 128 acres
------------------
* Properties obtained through foreclosure in 1994.
In September 1994, the Trust recorded the insubstance foreclosure of the
Circletree Apartments, a 414 unit apartment complex in Waukegan, Illinois. The
Circletree Apartments had an estimated fair value, less estimated costs of
sale, of $8.1 million at the date of foreclosure, which approximated the
carrying value of the Trust's mortgage note receivable. The foreclosure
resulted in no loss to the Trust. Foreclosure proceedings were completed in
October 1994.
Also in September 1994, the Trust recorded the insubstance foreclosure of the
Woodbridge Apartments, a 194 unit apartment complex in Westminster, Colorado.
The Woodbridge Apartments had an estimated fair value, less estimated costs of
sale, of $3.3 million at the date of foreclosure,
16
17
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
which exceeded the carrying value of the Trust's mortgage note receivable. The
foreclosure resulted in no loss to the Trust. Foreclosure proceedings were
completed in February 1995.
In February 1994, the Trust sold the Kimberly Square Shopping Center, a
foreclosed property held for sale in Fort Lauderdale, Florida, for $1.0 million
in cash. No loss in excess of the reserve previously provided was incurred.
The Trust paid a real estate sales commission of $30,000 to Carmel Realty based
upon the $1.0 million sales price of the property.
In May 1994, the Trust sold the retail portion of Forest Ridge, a foreclosed
apartment and retail property held for sale in Denton, Texas. The property was
sold for $365,000, with the Trust providing purchase money financing for the
entire sales price. The Trust recognized neither a gain or loss on the sale.
The mortgage note receivable bears interest at a rate of 7.5% per annum for the
first three years, increasing to 8.3% per annum from May 1997 until maturity in
May 2001. The note requires monthly payments of principal and interest,
currently $3,000. The Trust paid a real estate sales commission of $15,000 to
Carmel Realty based upon the $365,000 sales price of the property.
In June 1994, the Trust sold a 546 acre tract of foreclosed undeveloped land
held for sale in Morgan, Utah for $110,000 in cash. No loss in excess of the
reserve previously provided was incurred. The Trust paid a real estate sales
commission of $4,000 to Carmel Realty based upon the $110,000 sales price of
the property.
Also in June 1994, the Trust sold the Oak Forest Apartments, a foreclosed
property held for sale in Tampa, Florida, for $900,000 in cash. The Trust
recognized a loss on the sale of $200,000 in excess of previously provided
reserves, which was provided by a direct charge against earnings in the first
quarter of 1994. The Trust paid a real estate sales commission of $36,000 to
Carmel Realty based upon the $900,000 sales price of the property.
In December 1994, the Trust sold two single family residences located in
Arizona and South Dakota, which it had obtained through foreclosure. The Trust
received $155,000 in cash from the sales. No loss in excess of the reserves
previously provided was incurred.
The three parcels of unimproved land owned by the Trust were each obtained
through foreclosure. Two were obtained through foreclosure of a mortgage note
secured primarily by office buildings. The third and largest, the Round
Mountain parcel, was intended to be developed in 1983 when the Trust funded the
mortgage loan secured by the land.
The Trust intends to hold these parcels of unimproved land until the market
conditions in the areas in which the properties are located improve, at which
time the Trust intends to offer the properties for sale. The Declaration of
Trust provides that the Trust may not invest in unimproved real estate or make
mortgage loans secured by unimproved
17
18
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
real estate unless the property is being or is expected to be developed within
a reasonable period of time or unless the unimproved real estate serves as
additional security on a permitted type of mortgage loan.
During 1994, many of the real estate markets where the Trust owns foreclosed
property, particularly in Texas, continued to stabilize and the Trust intends
to increase its emphasis on the sale of foreclosed properties in 1995.
However, because of increasing interest rates in 1994, it is often difficult
for potential buyers to obtain financing even for performing properties
because, among other factors, traditional real estate lenders remain extremely
cautious in approving new mortgage loans.
Mortgage Loans
In addition to real estate, a substantial portion of the Trust's assets are
invested in mortgage notes receivable, principally those secured by
income-producing properties. The Trust expects that the percentage of its
assets invested in mortgage notes will decrease, as it has determined that it
will no longer seek to fund or acquire new mortgage notes, other than those
which it may originate in conjunction with providing purchase money financing
in conjunction with a property sale. The Trust does intend, however, to
service and hold for investment the mortgage notes currently in its portfolio.
The Trust's mortgage notes receivable consist of first mortgage loans and
junior mortgage loans.
Types of Mortgage Activity. In the past, the Trust has originated its own
mortgage loans as well as acquired existing mortgage notes either directly from
builders, developers or property owners, or through mortgage banking firms,
commercial banks or other qualified brokers. The Trust is not considering new
mortgage lending, except in connection with purchase money financing offered to
facilitate the sale of Trust properties. BCM, in its capacity as a mortgage
servicer, services the Trust's mortgage notes. The Trust's investment policy
is described in ITEM 1. "BUSINESS - Business Plan and Investment Policy".
Types of Properties Subject to Mortgages. The properties securing the Trust's
mortgage notes receivable portfolio at December 31, 1994, consisted of office
buildings, apartments and single-family residences. To the extent that the
Declaration of Trust does not control such matters, the Trust's Board of
Trustees may alter the types of properties subject to mortgage loans in which
the Trust invests without a vote of the Trust's shareholders. In addition to
restricting the types of collateral and priority of mortgages, the Declaration
of Trust imposes certain restrictions on transactions with related parties, as
discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
At December 31, 1994, the Trust's mortgage notes receivable portfolio included
ten mortgage loans with an aggregate outstanding balance of $10.3 million
secured by income-producing real estate located throughout the United States
and seven mortgage loans with an outstanding balance
18
19
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
of $667,000 secured by single-family residences also located throughout the
United States. At December 31, 1994, 4% of the Trust's assets were invested in
mortgage notes (3% in first mortgage loans and 1% in junior mortgage loans).
The following table sets forth the percentages (based on the outstanding
mortgage note balance) , by both property type and geographic region, of the
properties that serve as collateral for the Trust's outstanding mortgage notes
receivable portfolio at December 31, 1994. The table does not include the
$667,000 in mortgage notes secured by single-family residences discussed in
the preceding paragraph. See Schedule IV to the Consolidated Financial
Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
for further details of the Trust's mortgage notes receivable portfolio.
Commercial
Region Apartments Properties Total
------------ ---------- ---------- -------
Southeast. . . . . . . . . . . . . . 6.3% 26.6% 32.9%
Southwest. . . . . . . . . . . . . . 14.9 - 14.9
Midwest. . . . . . . . . . . . . . . 52.2 - 52.2
---- ---- -----
73.4% 26.6% 100.0%
A summary of the activity in the Trust's mortgage notes receivable portfolio
during 1994 is as follows:
Loans in mortgage notes receivable portfolio
at January 1, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Loan created through the sale of property. . . . . . . . . . . . . . . . . . . . . . . 1
Loan received in settlement of profit participation. . . . . . . . . . . . . . . . . . 1
Loans paid in full . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
Loans foreclosed by the Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3)
---
Loans in mortgage notes receivable portfolio
at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
===
First Mortgage Loans. The Trust has invested in first mortgage notes, with
either short, medium or long-term maturities. First mortgage loans generally
provide for level periodic payments of principal and interest sufficient to
substantially repay the loan prior to maturity, but may involve interest-only
payments or moderate amortization of principal and a "balloon" principal
payment at maturity. With respect to first mortgage loans, it was the Trust's
general policy to require that the borrower provide a mortgagee's title policy
or an acceptable legal title opinion as to the validity and the priority of the
mortgage lien over all other obligations, except liens arising from unpaid
property taxes and other exceptions normally allowed by first mortgage lenders
in the relevant area. The Trust may grant to other lenders participations in
first mortgage loans originated by the Trust.
The following discussion briefly describes the first mortgage loans that the
Trust originated or otherwise acquired, as well as events that affected
previously funded first mortgage loans, during 1994.
19
20
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
During 1994, the Trust foreclosed on a single-family residence in South Dakota
securing one of its mortgage notes. No loss was recorded on the foreclosure.
The property was sold in December 1994, as discussed under "Real Estate" above.
At December 31, 1994, seven mortgage notes secured by single family
residences, with principal balances totaling $667,000, remained in the Trust's
mortgage note receivable portfolio.
As discussed under "Real Estate" above, in May 1994, the Trust sold the retail
portion of Forest Ridge, a foreclosed apartment and retail property held for
sale in Denton, Texas. The property was sold for $365,000, with the Trust
providing purchase money financing for the entire sales price. The mortgage
note receivable bears interest at a rate of 7.5% per annum for the first three
years, increasing to 8.3% per annum from May 1997 until maturity in May 2001.
The note requires monthly payments of principal and interest, currently $3,000.
In December 1994, as discussed below, the Trust accepted the assignment of a
first mortgage note in settlement of the profit participation as provided in
the wraparound mortgage secured by the Fountainview Retirement Center.
At December 31, 1994, a $700,000 first mortgage note secured by an office
building in Titusville, Florida, an $891,000 first mortgage note secured by an
apartment in Detroit, Michigan and an $1.5 million first mortgage secured by
another apartment in Detroit, Michigan were in default. The Trust is currently
evaluating its options with respect to foreclosure of the collateral properties
securing these notes. If the Trust forecloses the collateral properties, the
Trust does not anticipate incurring losses in excess of previously established
reserves.
Also at December 31, 1994, a $1.5 million first mortgage secured by a ranch
located in Henderson County, Texas, was in default. In February 1994, the
Trust and the borrower agreed to modify and extend the note. In exchange for
the Trust agreeing to extend the maturity date to November 1, 1995, the
borrower paid all past due interest and made a $127,000 paydown on the
principal balance of the note. The borrower was also required to make an
additional $200,000 principal paydown on November 1, 1994, which had not been
made as of March 17, 1995. The borrower is currently negotiating with the
Trust for an 18 month extension of the note in return for a principal paydown
and a pledge of additional collateral to secure the note. If negotiations are
unsuccessful and the Trust forecloses on the collateral property, it does not
anticipate incurring a loss, as the estimated fair value of the property
securing the note is in excess of the carrying value of the note.
Wraparound Mortgage Loans. The Trust has invested in wraparound mortgage
loans, sometimes called all-inclusive loans, made on real estate subject to
prior mortgage indebtedness. A wraparound mortgage
20
21
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
loan is a mortgage loan having an original principal amount equal to the
outstanding balance under the prior existing mortgage loan(s) plus the amount
actually advanced under the wraparound mortgage loan.
Wraparound mortgage loans may provide for full, partial or no amortization of
principal. The Trust's policy was to make wraparound mortgage loans in amounts
and on properties as to which it would otherwise make first mortgage loans.
The Trust did not originate or acquire any wraparound mortgage loans during
1994. The following discussion briefly describes the events that affected
previously funded wraparound mortgage loans during 1994.
In December 1994, the Trust received payment in full on the wraparound mortgage
note secured by the Fountainview Retirement Center. The Trust received $5.0
million in cash, equal to the Trust's equity in the wraparound mortgage note.
In addition, the note agreement required that the debtor make an additional
profit participation payment equal to 62.5% of the amount by which the fair
market value of the property on the maturity date of the loan exceeded the
original loan principal balance. In settlement of the profit participation,
the borrower assigned a $1.8 million first mortgage note, secured by Cypress
Creek Executive Court, an office building in Ft. Lauderdale, Florida, to the
Trust, for which the Trust paid $283,000 in cash. The first mortgage bears
interest at rates ranging from 8.0% to 9.0% per annum, requires monthly
payments of principal and interest, currently $15,000, and matures in June
2009. The Trust discounted the note to yield 12.0% per annum. The Trust
recognized $1.1 million gain on the settlement of the profit participation.
In January 1994, the borrower on a $7.9 million wraparound mortgage loan
secured by the Circletree Apartments in Waukegan, Illinois filed for bankruptcy
protection and in September 1994, the Trust recorded the insubstance
foreclosure of the apartment complex securing the wraparound mortgage note
receivable. The foreclosure resulted in no loss to the Trust. See "Real
Estate," above.
Junior Mortgage Loans. The Trust has invested in junior mortgage loans. Such
loans are secured by mortgages that are subordinate to one or more prior liens
either on the fee or a leasehold interest in real estate. Recourse on such
loans ordinarily includes the real estate on which the loan is made, other
collateral and personal guarantees by the borrower. The Trust's Declaration of
Trust restricts investment in junior mortgage loans, excluding wraparound
mortgage loans, to not more than 10% of the Trust's assets. At December 31,
1994, 1% of the Trust's assets were invested in junior mortgage loans.
The Trust did not originate or acquire any junior mortgage loans during 1994.
The following discussion briefly describes the events that affected previously
funded junior mortgage loans during 1994.
21
22
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
In September 1994, the Trust recorded the insubstance foreclosure of the
Woodbridge Apartments in Westminster, Colorado, which secured a $1.9 million
junior mortgage note receivable. The foreclosure resulted in no loss to the
Trust. See "Real Estate," above.
In September 1991, the Trust funded a $2.0 million junior mortgage loan,
secured by the Aspen Village Townhomes, located in Hartland, Wisconsin. The
note accrues interest at the default interest rate of 18% per annum. The note
had an extended maturity date of April 27, 1992. On March 27, 1992, the Trust
funded an additional $150,000 junior lien mortgage loan, also secured by the
Aspen Village Townhomes. This note also bears interest at the default interest
rate of 18% per annum. This note had an extended maturity of September 23,
1992. The borrower failed to make the required principal payments to the Trust
on the maturity dates. The Trust continues to negotiate with the borrower to
restructure the notes, with the borrower providing additional collateral to
secure these loans. If the negotiations are unsuccessful and the Trust
forecloses on the collateral property, it does not anticipate incurring a loss
in excess of previously established reserves.
Equity Investments in Real Estate Entities
In September 1990, the Trust's Board of Trustees authorized the purchase of up
to $2.0 million of the common stock of ART through negotiated or open market
transactions. The officers of the Trust serve as officers or directors of ART
and BCM, the Trust's advisor, also serves as advisor to ART. At March 17,
1995, ART owned approximately 35% of the Trust's outstanding shares of
beneficial interest. At December 31, 1994, the Trust owned 204,522 shares of
ART's common stock, approximately 7% of ART's outstanding shares of common
stock, which the Trust had purchased in open market transactions in 1990 and
1991, at a total cost to the Trust of $1.6 million. The ART common stock owned
by the Trust is considered to be available for sale and accordingly, is carried
at fair value defined as the period end closing market value. At December 31,
1994, the market value of the ART shares was $2.7 million. See ITEM 8.
"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
In December 1990, the Trust's Board of Trustees authorized the purchase of up
to $1.0 million of the shares of beneficial interest of NIRT, a REIT that
until March 31, 1994, was also advised by BCM, and up to $1.0 million of the
shares of common stock of TCI through negotiated or open market transactions.
The Trustees of the Trust serve as directors of TCI and the officers of the
Trust also serve as officers of TCI. BCM, the Trust's advisor, serves as
advisor to TCI. At December 31, 1994, the Trust owned 76,893 shares of
beneficial interest of NIRT acquired at a total cost to the Trust of $415,000
and 53,000 shares of common stock of TCI acquired at a total cost to the Trust
of $235,000 all of which shares the Trust had purchased in open market
transactions in 1990 and 1991. The Trust's investment in these entities is
also considered as available for sale and is also carried at fair value. At
December 31, 1994, the market value of the Trust's investment in NIRT and TCI
shares was $894,000 and $788,000, respectively.
22
23
ITEM 2. PROPERTIES (Continued)
Equity Investments in Real Estate Entities (Continued)
Under the original terms of the Declaration of Trust, the Trust was prohibited
from investing in equity securities for a period in excess of 18 months.
However, pursuant to an amendment to the Trust's Declaration of Trust approved
by the Trust's shareholders, the Trust may hold these shares of ART, NIRT and
TCI until July 30, 1996.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
In February 1990, the Trust, together with IORT, NIRT and TCI, three real
estate entities with, at the time, the same officers, directors or trustees and
advisor as the Trust, entered into a settlement of a class and derivative
action entitled Olive et al. v. National Income Realty Trust et al., relating
to the operation and management of each of such entities. On April 23, 1990,
the court granted final approval of the terms of the settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the court on July 1, 1994 and final court approval
was entered on December 12, 1994. The effective date of the Modification is
January 11, 1995.
The Modification, among other things, provided for the addition of three new
unaffiliated members to the Trust's Board of Trustees and set forth new
requirements for the approval of any transactions with affiliates over the next
five years. In addition, BCM, the Trust's advisor, Mr. Phillips and William S.
Friedman, who served as President and Trustee of the Trust until February 24,
1994, President of BCM until May 1, 1993 and director of BCM until December 22,
1989, agreed to pay a total of $1.2 million to the Trust, IORT, NIRT and TCI,
of which the Trust's share is $750,000. The Trust received $187,000 in May
1994. The remaining $563,000 is to be paid in 18 monthly installments which
began February 1, 1995.
Under the Modification, the Trust, IORT, NIRT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, IORT, NIRT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current members of the
Trust's Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Trust's Board of Trustees appointed pursuant to the
terms of the Modification that stand for reelection during the three calendar
years following the effective date of the Modification.
23
24
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
Pursuant to the terms of the Modification, any related party transaction which
the Trust may enter into prior to April 27, 1999, will require the unanimous
approval of the Trust's Board of Trustees. In addition, related party
transactions may only be entered into in exceptional circumstances and after a
determination by the Trust's Board of Trustees that the transaction is in the
best interests of the Trust and that no other opportunity exists that is as
good as the opportunity presented by such transaction.
The Modification also terminated a number of the provisions of the settlement,
including the requirement that the Trust, IORT, NIRT and TCI maintain a Related
Party Transaction Committee and a Litigation Committee of their respective
Boards. The court retained jurisdiction to enforce the Modification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust held its annual meeting of shareholders on March 7, 1995, at which
meeting the Trust's shareholders were asked to consider and vote upon (i) the
election of Trustees of the Trust and (ii) the renewal of the Trust's advisory
agreement with BCM.
At such meeting the Trust's shareholders elected the following individuals as
Trustees of the Trust:
Shares Voting
-----------------------------------
Withheld
Trustee For Authority
------- --------- -----------
Geoffrey C. Etnire 2,291,690 93,607
Harold Furst, Ph.D. 2,328,914 56,384
John P. Parsons 2,331,392 53,906
Bennett B. Sims 2,329,151 56,146
Ted P. Stokely 2,331,303 53,994
Martin L. White 2,330,002 55,296
Edward G. Zampa 2,331,211 54,087
Also at such meeting the Trust's shareholders approved the renewal of the
Trust's advisory agreement with BCM until the next annual meeting of the
Trust's shareholders with 2,276,340 votes for the proposal, 50,469 votes
against the proposal and 58,487 votes abstaining.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
24
25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED
SHAREHOLDER MATTERS
The Trust's shares of beneficial interest are traded on The Nasdaq Stock Market
("Nasdaq") using the symbol "CMETs". The following table sets forth the high
and low prices as reported by the Nasdaq.
QUARTER ENDED HIGH LOW
------------------ -------- -------
March 31, 1995
(through March 17, 1995) . . . . . . . . . . . . . . . . . . . . . . $ 15 1/4 $ 15
March 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1/2 12 1/2
June 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1/2 14
September 30, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . 14 3/4 14
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 15 14
March 31, 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1/4 6 1/4
June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5/8 8
September 30, 1993. . . . . . . . . . . . . . . . . . . . . . . . . . 14 3/4 9
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1/2 12 1/2
As of March 17, 1995, the closing price of the Trust's shares of beneficial
interest on the Nasdaq was $15.00 per share.
As of March 17, 1995, the Trust's shares of beneficial interest were held by
7,484 holders of record.
Based on the performance of the Trust's properties, in January 1993, the
Trust's Board of Trustees approved the resumption of quarterly shareholder
distributions. The Trust paid distributions in 1994 and 1993 as follows:
Date Declared Record Date Payable Date Amount
---------------- ----------------- ----------------- ------
February 15, 1994 March 1, 1994 March 21,1994 $ .15
May 6, 1994 June 1, 1994 June 15, 1994 $ .15
August 24, 1994 September 15, 1994 September 30, 1994 $ .15
December 1, 1994 December 15, 1994 December 30, 1994 $ .15
January 27, 1993 February 15, 1993 March 1, 1993 $ .10
April 30, 1993 May 24, 1993 June 1, 1993 $ .10
June 30, 1993 August 16, 1993 September 1, 1993 $ .15
October 29, 1993 November 15, 1993 December 1, 1993 $ .15
On December 5, 1989, the Trust's Board of Trustees approved a program for the
Trust to repurchase its shares of beneficial interest. The Trust's Board of
Trustees has authorized the Trust to repurchase a total of 976,667 of its
shares of beneficial interest pursuant to such program. Through March 17,
1995, the Trust had repurchased 785,150 of its shares at a total cost to the
Trust of $5.0 million. The Trust purchased 6,000 of its shares of beneficial
interest during 1994 at a total cost to the Trust of $84,000.
25
26
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS (Continued)
On March 24, 1989, the Trust distributed one share purchase right for each
outstanding share of beneficial interest of the Trust. On December 10, 1991,
the Trust's Board of Trustees voted to redeem the rights, having determined
that the rights were no longer necessary to protect the Trust from coercive
tender offers. In connection with such redemption, Messrs. Phillips and
Friedman and their affiliates, who owned approximately 28% of the Trust's
outstanding shares of beneficial interest at the time, agreed not to acquire
more than 40% of the Trust's outstanding shares of beneficial interest without
the prior action of the Trust's Board of Trustees to the effect that they do
not object to such increased ownership.
On August 23, 1994, the Trust's Board of Trustees took action to the effect
that they do not object to the acquisition of up to 49% of the Trust's
outstanding shares of beneficial interest by Mr. Phillips and his affiliates.
In determining total ownership, shares of beneficial interest of the Trust, if
any, owned by Mr. Friedman and his affiliates are no longer to be included.
Pursuant to this action, Mr. Phillips and his affiliates may not acquire more
than 49% of the Trust's outstanding shares of beneficial interest without the
prior action of the Trust's Board of Trustees to the effect that they do not
object to such increased ownership. At March 17, 1995, Mr. Phillips and his
affiliates, primarily ART and BCM, owned approximately 43% of the Trust's
outstanding shares of beneficial interest.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
26
27
ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------- -------------
(dollars in thousands, except per share)
EARNINGS DATA
Income . . . . . . . . . . $ 29,262 $ 23,710 $ 20,818 $ 15,035 $ 15,582
Expense. . . . . . . . . . 31,803 23,460 20,443 15,812 18,835
------------ ------------ ------------ ------------- -------------
Income (loss) before
gain on sale of real
estate and
extraordinary gain. . . . (2,541) 250 375 (777) (3,253)
Gains on sale of
real estate . . . . . . . 1,708 365 383 234 -
Extraordinary gain . . . . - - - 930 4,179
------------ ------------ ------------ ------------- -------------
Net income (loss). . . . . $ (833) $ 615 $ 758 $ 387 $ 926
============ ============ ============ ============= =============
EARNINGS PER SHARE DATA
Income (loss) before
gain on sale of real
estate and
extraordinary gain. . . . $ (.87) $ .08 $ .11 $ (.22) $ (.90)
Gain on sale of real
estate. . . . . . . . . . .58 .12 .11 .07 -
Extraordinary gain . . . . - - - .26 1.15
------------ ------------ ------------ ------------- -------------
Net income (loss). . . . . $ (.29) $ .20 $ .22 $ .11 $ .25
============ ============ ============ ============= =============
Distributions per share. . $ .60 $ .50 $ - $ 1.06 $ 1.32
Weighted average
shares outstanding. . . . 2,919,815 3,014,256 3,372,508 3,538,932 3,639,383
December 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------- -------------
(dollars in thousands, except per share)
BALANCE SHEET DATA
Notes and interest
receivable. . . . . . . . $ 11,215 $ 34,518 $ 37,049 $ 42,545 $ 34,941
Real estate. . . . . . . . 149,364 111,483 94,557 85,501 50,225
Investment in
partnerships. . . . . . . 13,805 14,079 14,537 20,148 22,184
Total assets . . . . . . . 182,839 160,462 143,925 140,950 103,080
Notes and interest
payable . . . . . . . . . 98,252 74,786 58,834 54,226 13,492
Shareholders' equity . . . 78,767 81,139 81,985 83,290 82,860
Book value per share . . . $ 26.99 $ 27.80 $ 25.69 $ 23.91 $ 23.29
27
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Continental Mortgage and Equity Trust (the "Trust") was formed to invest in
real estate through acquisitions, leases and partnerships and in mortgage loans
on real estate, including wraparound, first and junior mortgage loans. The
Trust was organized on August 27, 1980 and commenced operations on December 3,
1980.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $7.5 million at December 31, 1994 compared
with $1.8 million at December 31, 1993. The principal reasons for this
increase in cash are discussed in the paragraphs below.
The Trust's principal sources of cash have been and will continue to be from
property operations, proceeds from property sales, principal payments on
mortgage notes receivable and borrowings. The Trust expects that funds from
operations and from anticipated external sources, such as property sales,
financings and refinancings, will be sufficient to meet the Trust's various
cash needs in 1995, including, but not limited to, the payment of
distributions, debt service obligations coming due and property maintenance and
improvements, as more fully discussed in the paragraphs below.
The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) has continually increased over the past three
years from $6.1 million in 1992 to $8.4 million in 1993 to $10.7 million in
1994. Of this $4.6 million net increase from 1992 to 1994, $4.2 million is the
result of the Trust having acquired additional income producing properties,
both through purchase and foreclosure, and the remainder of $400,000 is due to
increased occupancy and rental rates, primarily at its apartments, and the
Trust's control of operating expenses. The Trust's management believes that
this trend will continue, particularly in the Trust's apartments, if the
economy remains stable or improves.
Interest collected on mortgage notes receivable decreased over the past three
years from $3.2 million in 1992 to $2.4 million in 1993 to $2.2 million in
1994. These decreases are primarily attributable to the foreclosure of the
collateral property securing mortgage notes receivable and the payoff of
mortgage notes receivable in 1993 and 1994.
Interest will continue to decrease as a source of cash to the Trust as a result
of the payoff of mortgage notes receivable and the foreclosure of the
collateral property securing mortgage notes receivable in 1994 and 1993. In
addition, the Trust has determined not to originate new mortgage loans, other
than those resulting from Trust provided purchase money financing in connection
with property sales.
The Trust was involved in significant investing activities during 1994. The
Trust purchased seven apartments and one commercial property during 1994, for
which the Trust paid a total of $33.5 million. The Trust paid $9.9 million in
cash, with an additional $23.6 million
28
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
financed through mortgage debt. The Trust also made improvements to its other
properties totaling $729,000 and received $2.2 million in cash from the sale of
five of its properties and an additional $1.3 million in cash from the sale of
a property by one of the Trust's equity method partnerships. In addition, the
Trust collected $5.6 million on notes receivable, primarily from the payoff of
two mortgage notes receivable totaling $5.4 million, with the remainder
collected from scheduled paydowns on the Trust's other mortgage notes
receivable.
During 1994, the Trust received net financing proceeds of $6.9 million from
mortgage financing secured by four previously unencumbered apartment complexes.
In addition, the Trust refinanced the mortgage secured by another apartment
complex from which the Trust received $646,000 in net cash proceeds after the
payoff of $2.5 million in existing mortgage debt. Also during 1994, the Trust
made scheduled principal payments on mortgages totaling $1.1 million.
The Trust's distribution policy had provided for an annual determination of
distributions after the Trust's year end until such time as property operations
stabilized at a level producing cash flow from property operations in excess of
anticipated needs. In January 1993, the Trust's Board of Trustees approved the
resumption of quarterly distributions. In 1994, the Trust paid distributions
to shareholders totaling $1.8 million ($.60 per share). The Trust paid
distributions to shareholders totaling $1.5 million ($.50 per share) in 1993.
During the first quarter of 1995, the Trust has continued to be an active
investor. The Trust has purchased two industrial facilities, for which the
Trust paid a total of $2.9 million in cash with an additional $13.8 million
financed through mortgage debt. The Trust derived the cash portions of the
purchase prices from its cash on hand at December 31, 1994.
During 1994, the Trust repurchased 6,000 of its shares of beneficial interest
at a cost of $84,000, pursuant to a repurchase program originally announced by
the Trust on December 5, 1989. The Trust's Board of Trustees have authorized
the Trust to repurchase a total of 976,667 of its shares of beneficial interest
under such repurchase program, of which 191,517 shares remain to be purchased
as of March 17, 1995.
On a quarterly basis, the Trust's management reviews the carrying value of the
Trust's mortgage notes receivable, properties held for investment and
properties held for sale. Generally accepted accounting principles require
that the carrying value of an investment cannot exceed the lower of its cost or
its estimated net realizable value. In those instances in which estimates of
net realizable value of the Trust's properties or notes are less than the
carrying value thereof at the time of evaluation, a provision for loss is
recorded by a charge against earnings. Estimated net realizable value of
mortgage notes receivable is based on the Trust's management's review and
evaluation of the
29
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
collateral properties securing such notes. The property review generally
includes selective property inspections, a review of the property's current
rents compared to market rents, a review of the property's expenses, a review
of maintenance requirements, discussions with the manager of the property and a
review of properties in the surrounding area.
Results of Operations
1994 compared to 1993. For the year 1994, the Trust had a net loss of
$833,000, as compared to net income of $615,000 for the year 1993. The primary
factors contributing to the decrease in the Trust's net income are discussed in
the following paragraphs.
Net rental income (rental income less property operating expenses) increased
from $8.2 million in 1993 to $10.2 million in 1994. Of this increase, $1.5
million is due to the acquisition of seven apartment complexes and one
commercial property in 1994. An additional $284,000 of the increase is
attributable to two apartment complexes obtained through foreclosure in 1994
and $1.1 million is due to the acquisition of three apartment complexes and one
commercial property in 1993. An additional increase of approximately $400,000
is attributable to generally higher rents and occupancy at the Trust's
properties. These increases are offset in part by a $1.3 million decrease in
net rental income at four of the Trust's commercial properties and three of the
Trust's apartment complexes due to a decrease in occupancy and higher operating
expenses incurred in an effort to increase occupancy. Net rental income is
expected to continue to increase in 1994, primarily from a full year of
operations from the seven apartment complexes and one commercial property
acquired in 1994 and from the anticipated purchase of additional real estate in
1995.
Interest income decreased from $3.3 million in 1993 to $2.7 million in 1994.
Of this decrease, $356,000 is attributable to a loan on which the borrower
filed for bankruptcy protection in November 1993 and began making cash flow
only payments in April 1994. The Trust completed foreclosure of the property
securing this loan in October 1994. Of the decrease, an additional $191,000 is
attributable to three loans which were paid off subsequent to August 1993 and
$38,000 is attributable to loans which were classified as nonperforming in
1994. Interest income is expected to decline further in 1995 due to a $14.0
million wraparound mortgage note receivable being paid in full in December 1994
and due to the foreclosure during 1994 of two properties securing two of the
Trust's other mortgage notes receivable. Further, the Trust is not considering
new mortgage lending except in connection with purchase money financing of
sales of the Trust's properties.
The Trust's equity in losses of partnerships decreased from $578,000 in 1993 to
$479,000 in 1994. This decrease in equity losses is primarily due to higher
rents and occupancy at the 32 industrial warehouse
30
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
facilities owned by Indcon, L.P. ("Indcon"), a joint venture partnership in
which the Trust owns a 60% interest.
Interest expense increased from $5.5 million in 1993 to $7.7 million in 1994.
Of this increase, $1.5 million is due to interest expense recorded on mortgages
secured by properties acquired in 1993 and 1994. An additional $597,000 is due
to interest expense on a borrowing in September 1993 and four borrowings in
1994, all secured by mortgages on previously unencumbered apartment complexes.
Depreciation expense increased from $2.4 million in 1993 to $3.2 million in
1994. This increase is due to the acquisition of seven apartment complexes and
one commercial property in 1994 and four apartment complexes and one commercial
property in 1993.
A provision for losses of $1.2 million was recorded in 1994 to write down the
Genesee Towers, an office building, to the amount of the nonrecourse mortgage
debt. In addition, a provision for losses of $200,000 was recorded in 1994 to
provide for the loss on the sale of Oak Forest Apartments, one of the Trust's
foreclosed properties held for sale. (See NOTE 4. "REAL ESTATE.") A provision
for loss of $221,000 was recorded in 1993 to provide for the loss on the sale
of English Hills Apartments, also a foreclosed property held for sale.
Advisory fee to affiliate increased from $1.2 million in 1993 to $1.3 million
in 1994. This increase is due to an increase in the Trust's gross assets, the
basis for the advisory fee, as a result of the Trust's acquisition of eight
properties in 1994 and five properties in 1993. The advisory fee is expected
to continue to increase as the Trust makes additional property acquisitions.
General and administrative expenses decreased from $1.3 million in 1993 to $1.2
million in 1994. A decrease in legal fees and expenses incurred in connection
with the Trust's annual meeting were offset in part by an increase in cost
reimbursements to the Trust's advisor.
For the year 1994, the Trust recognized a gain on the sale of real estate of
$577,000 related to the sale of an industrial warehouse facility by Indcon, a
joint venture partnership in which the Trust owns a 60% interest. In addition,
the Trust recognized a gain of $1.1 million on the settlement of a profit
participation related to the 1994 payoff of one of the Trust's notes
receivable. For the year 1993, the Trust recognized gains on sale of real
estate of $365,000 related to the sale of three properties by Sacramento Nine
("SAC 9"), a joint venture partnership in which the Trust owns a 30% interest.
1993 compared to 1992. For the year 1993, the Trust had net income of
$615,000, as compared to net income of $758,000 for the year 1992. The primary
factors contributing to the decrease in the Trust's net income are discussed in
the following paragraphs.
31
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Net rental income (rental income less property operating expenses) increased
from $6.3 million in 1992 to $8.2 million in 1993. Of this increase, $1.3
million is due to the acquisition of five apartment complexes, one office
building and one industrial facility in 1992 and 1993, and an additional
$165,000 is due to a decrease in operating expenses at Applecreek Apartments,
the renovation of which was completed in 1992. The remaining increase is
attributable to generally higher rental and occupancy rates, primarily at the
Trust properties in the Southwest and Southeast, and reduced operating expenses
at the Trust's apartment complexes.
Interest income decreased from $4.2 million in 1992 to $3.3 million in 1993.
Of this decrease, $502,000 is due to loans which were paid in full in 1992 and
1993 and an additional $312,000 is due to interest income recorded on loans
which were foreclosed or settled in 1992 and 1993. The remaining decrease is
due to loans which were placed on nonaccrual in 1993.
The Trust's equity in losses of partnerships increased from losses of $344,000
in 1992 to losses of $578,000 in 1993. This increase is primarily due to
decreased operating results in the SAC 9 partnership as a result of the sale of
three properties in the second quarter of 1993.
Interest expense increased from $5.1 million in 1992 to $5.5 million in 1993.
Of this increase, $847,000 is due to interest expense incurred on mortgages
secured by properties which were acquired in late 1992 and in 1993. An
additional increase of $73,000 is due to interest expense recorded on a first
mortgage obtained in September 1993, secured by a previously unencumbered
apartment property. These increases were partially offset by a decrease in
interest expense of $458,000 attributable to a mortgage modification in
November 1992 and an underlying mortgage debt related to a wraparound mortgage
note receivable which was paid off in December 1992.
Depreciation expense increased from $2.0 million in 1992 to $2.4 million in
1993. This increase is primarily due to the acquisition of five apartment
complexes and two commercial properties in late 1992 and in 1993.
A provision for loss of $221,000 was recorded in 1993 to provide for the loss
on the sale of English Hills Apartments, a foreclosed property held for sale.
No provision for loss was recorded in 1992.
General and administrative expenses decreased from $1.4 million in 1992 to $1.3
million in 1993. This decrease is due to a decrease of $100,000 related to
costs incurred in connection with the Trust's March 1992 annual meeting of
shareholders and the February 1992 Rights redemption and a decrease in
litigation expense.
For the year 1993, the Trust recognized gains on sale of real estate of
$365,000 related to the sale of three properties by SAC 9, a joint venture
partnership in which the Trust owns a 30% interest.
32
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Trust for personal injury
associated with such materials.
The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets or results of operations.
Inflation
The effects of inflation on the Trust's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with increases and
decreases in housing costs. Fluctuations in the rate of inflation also affect
the sales values of properties and, correspondingly, the ultimate gains to be
realized by the Trust from property sales. Inflation also has an effect on
the Trust's earnings from short-term investments.
Tax Matters
For the years ended December 31, 1994, 1993 and 1992, the Trust elected and in
the opinion of the Trust's management, qualified to be treated as a REIT as
defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"). To continue to qualify for federal taxation as a REIT
under the Code, the Trust is required to hold at least 75% of the value of its
total assets in real estate assets, government securities, cash and cash
equivalents at the close of each quarter of each taxable year. The Code also
requires a REIT to distribute at least 95% of its REIT taxable income plus 95%
of its net income from foreclosure property, as defined in Section 857 of the
Code, on an annual basis to shareholders.
Recent Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors
for Impairment of a Loan", which amends SFAS No. 5 - "Accounting for
Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for
Troubled Debt Restructurings." The statement requires that notes receivable be
considered impaired when "based on current information and events, it is
probable that a creditor will be unable to collect all amounts due, both
principal and interest, according to the contractual terms of the loan
agreement". Impairment is to be measured either on the present value of
expected future cash flows discounted at the note's effective interest rate or
if the note is
33
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
collateral dependent, on the fair value of the collateral. In October 1994,
the FASB issued SFAS No. 118 - "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure" which amends SFAS No. 114. SFAS No.
118 eliminates the income recognition provisions of SFAS No. 114, substituting
disclosure of the creditor's policy of income recognition on impaired notes.
SFAS No. 114 and SFAS No. 118 are both effective for fiscal years beginning
after December 15, 1994. The Trust's management has not fully evaluated the
effects of implementing these statements, but expects that they will not affect
the Trust's interest income recognition policy but may require the
classification of otherwise performing loans as impaired.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
34
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------
Continental Mortgage and Equity Trust
-------------------------------------
Report of Independent Certified Public Accountants. . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets -
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Operations -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . 38
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . 39
Consolidated Statements of Cash Flows -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . 40
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 43
Schedule III - Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . 63
Schedule IV - Mortgage Loans on Real Estate. . . . . . . . . . . . . . . . . . . . . . . . . 67
All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Financial Statements
or the notes thereto.
35
36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees of
Continental Mortgage and Equity Trust
We have audited the accompanying consolidated balance sheets of Continental
Mortgage and Equity Trust and Subsidiaries as of December 31, 1994 and 1993 and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1994.
We have also audited the schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedules.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Continental Mortgage and Equity Trust and Subsidiaries as of December 31, 1994
and 1993, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN
Dallas, Texas
March 21, 1995
36
37
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
1994 1993
--------------- ---------------
Assets (dollars in thousands)
------
Notes and interest receivable
Performing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,269 $ 20,441
Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . . . . 6,946 14,077
--------------- ---------------
11,215 34,518
Real estate held for sale, net of accumulated
depreciation ($1,409 in 1994 and $1,300 in
1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,658 17,043
Less - allowance for estimated losses . . . . . . . . . . . . . . . . . (9,223) (8,946)
--------------- ---------------
26,650 42,615
Real estate held for investment, net of
accumulated depreciation ($12,050 in 1994 and
$9,078 in 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,706 94,440
Investment in marketable equity securities,
at market (including $3,447 in 1994 and
$3,196 in 1993 of affiliates) . . . . . . . . . . . . . . . . . . . . 4,341 4,087
Investment in partnerships . . . . . . . . . . . . . . . . . . . . . . 13,805 14,079
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 7,478 1,771
Other assets (including $604 in 1994 and $23
in 1993 due from affiliates) . . . . . . . . . . . . . . . . . . . . 5,859 3,470
--------------- ---------------
$ 182,839 $ 160,462
=============== ===============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes and interest payable . . . . . . . . . . . . . . . . . . . . . . $ 98,252 $ 74,786
Other liabilities (including $437 in 1994 and
$399 in 1993 due to affiliates) . . . . . . . . . . . . . . . . . . . 5,820 4,537
--------------- ---------------
104,072 79,323
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value;
authorized shares, unlimited; issued and
outstanding, 2,918,133 shares in 1994 and
2,919,189 shares in 1993 . . . . . . . . . . . . . . . . . . . . . . 8,766 8,769
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,060 260,098
Accumulated distributions in excess of
accumulated earnings . . . . . . . . . . . . . . . . . . . . . . . . (192,676) (190,091)
Net unrealized gains on marketable equity
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,617 2,363
--------------- ---------------
78,767 81,139
--------------- ---------------
$ 182,839 $ 160,462
=============== ===============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
37
38
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
-----------------------------------------------------------
1994 1993 1992
-------------- ---------------- --------------
(dollars in thousands, except per share)
Income
Rentals . . . . . . . . . . . . . . . . . . . . $ 27,042 $ 20,996 $ 16,990
Interest (including $20 in 1993 and
$104 in 1992 from affiliates) . . . . . . . 2,699 3,292 4,172
Equity in (losses) of partnerships . . . . . . (479) (578) (344)
-------------- ---------------- --------------
29,262 23,710 20,818
Expenses
Property operations (including
$570 in 1994, $296 in 1993 and
$209 in 1992 to affiliates) . . . . . . . . 16,888 12,791 10,670
Interest . . . . . . . . . . . . . . . . . . . 7,711 5,531 5,133
Depreciation . . . . . . . . . . . . . . . . . 3,214 2,431 2,020
Provision for losses . . . . . . . . . . . . . 1,429 221 -
Advisory fee to affiliate . . . . . . . . . . . 1,326 1,160 1,173
General and administrative
(including $524 in 1994, $453
in 1993 and $499 in 1992 to
affiliate) . . . . . . . . . . . . . . . . . 1,235 1,326 1,447
-------------- ---------------- --------------
31,803 23,460 20,443
-------------- ---------------- --------------
Income (loss) before gain on sale of
real estate . . . . . . . . . . . . . . . . . . (2,541) 250 375
Gain on sale of real estate . . . . . . . . . . . 1,708 365 383
-------------- ---------------- --------------
Net income (loss) . . . . . . . . . . . . . . . . $ (833) $ 615 $ 758
============== ================ ==============
Earnings per share
Income (loss) before gain on sale
of real estate . . . . . . . . . . . . . . . . $ (.87) $ .08 $ .11
Gain on sale of real estate . . . . . . . . . . . .58 .12 .11
-------------- ---------------- --------------
Net income (loss) . . . . . . . . . . . . . . . . $ (.29) $ .20 $ .22
============== ================ ==============
Weighted average shares of
beneficial interest used in
computing earnings per share . . . . . . . . . 2,919,815 3,014,256 3,372,508
============== ================ ==============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
38
39
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Unrealized
Shares of Distributions Gains on
Beneficial Interest in Excess of Marketable
----------------------- Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
----------- --------- ---------- ---------- ---------- -------------
(dollars in thousands)
Balance, January 1, 1992 . . . . . 3,482,904 $ 10,459 $ 262,791 $ (189,960) $ - $ 83,290
Repurchase of shares of
beneficial interest . . . . . . . (291,378) (873) (1,084) - - (1,957)
Redemption of share
purchase rights . . . . . . . . . - - (106) - - (106)
Net income . . . . . . . . . . . . - - - 758 - 758
----------- --------- ---------- ---------- -------- -----------
Balance, December 31, 1992 . . . . 3,191,526 9,586 261,601 (189,202) - 81,985
Repurchase of shares of
beneficial interest . . . . . . . (267,337) (802) (1,475) - - (2,277)
Distributions ($.50 per share) . . - - - (1,504) - (1,504)
Unrealized gains on marketable
equity securities . . . . . . . . - - - - 2,363 2,363
Net income . . . . . . . . . . . . - - - 615 - 615
----------- --------- ---------- ---------- -------- -----------
Balance, December 31, 1993 . . . . 2,924,189 8,784 260,126 (190,091) 2,363 81,182
Repurchase of shares of
beneficial interest . . . . . . . (6,056) (18) (66) - - (84)
Distributions ($.60 per share) . . - - - (1,752) - (1,752)
Unrealized gains on marketable
equity securities . . . . . . . . - - - - 254 254
Net (loss) . . . . . . . . . . . . - - - (833) - (833)
----------- --------- ---------- ---------- -------- -----------
Balance, December 31, 1994 . . . . 2,918,133 $ 8,766 $ 260,060 $ (192,676) $ 2,617 $ 78,767
=========== ========= ========== =========== ======== ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
39
40
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-----------------------------------------------------
1994 1993 1992
-------------- ------------- -------------
(dollars in thousands)
Cash Flows from Operating Activities
Rentals collected . . . . . . . . . . . . . . . . . . $ 27,155 $ 20,926 $ 16,855
Interest collected (including
$20 in 1993 and $104 in 1992 from
affiliates) . . . . . . . . . . . . . . . . . . . 2,171 2,413 3,153
Interest paid . . . . . . . . . . . . . . . . . . . . (6,559) (4,523) (4,044)
Payments for property operations
(including $570 in 1994, $296 in
1993 and $209 in 1992 to
affiliates) . . . . . . . . . . . . . . . . . . . (16,425) (12,524) (10,721)
General and administrative expenses
paid (including $524 in 1994,
$453 in 1993 and $499 in 1992 to
affiliates) . . . . . . . . . . . . . . . . . . . (1,327) (1,331) (1,783)
Advisory fee paid to affiliate . . . . . . . . . . . (1,305) (1,110) (1,131)
Distributions from partnerships'
operating cash flow . . . . . . . . . . . . . . . 191 - 557
Other. . . . . . . . . . . . . . . . . . . . . . . . . (888) 227 25
-------------- ------------- -------------
Net cash provided by operating
activities . . . . . . . . . . . . . . . . 3,013 4,078 2,911
Cash Flows from Investing Activities
Acquisitions of real estate
(including $1,396 in 1994, $666
in 1993 and $490 in 1992 to
affiliates) . . . . . . . . . . . . . . . . . . . (9,896) (4,018) (3,130)
Collections on notes receivable
(including $386 in 1993 and $403
in 1992 from affiliates) . . . . . . . . . . . . . 5,585 1,743 1,187
Fundings of notes receivable . . . . . . . . . . . . (283) (52) (300)
Proceeds from sale of real estate . . . . . . . . . . 2,166 177 150
Real estate improvements . . . . . . . . . . . . . . (729) (1,036) (882)
Distributions from partnerships'
investing cash flow . . . . . . . . . . . . . . . 1,275 748 510
Contributions to partnerships . . . . . . . . . . . . - (503) -
-------------- ------------- -------------
Net cash (used in)
investing activities . . . . . . . . . . . (1,882) (2,941) (2,465)
The accompanying notes are an integral part of these Consolidated Financial
Statements.
40
41
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
-----------------------------------------------------
1994 1993 1992
-------------- ------------- -------------
(dollars in thousands)
Cash Flows from Financing Activities
Proceeds from notes payable . . . . . . . . . . . . $ 10,078 $ 2,389 $ -
Payments on notes payable . . . . . . . . . . . . . (3,666) (808) (686)
Proceeds from margin borrowings . . . . . . . . . . - 500 -
Distributions to shareholders . . . . . . . . . . . (1,752) (1,504) -
Repurchase of shares of beneficial
interest . . . . . . . . . . . . . . . . . . . . (84) (2,320) (1,957)
Redemption of share purchase rights . . . . . . . . - - (106)
Distribution from partnership's
financing cash flows . . . . . . . . . . . . . . - - 4,200
-------------- ------------- -------------
Net cash provided by (used in)
financing activities . . . . . . . . . . . 4,576 (1,743) 1,451
-------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . . . 5,707 (606) 1,897
Cash and cash equivalents, beginning
of year . . . . . . . . . . . . . . . . . . . . . . 1,771 2,377 480
-------------- ------------- -------------
Cash and cash equivalents, end of year . . . . . . . $ 7,478 $ 1,771 $ 2,377
============== ============= =============
Reconciliation of net income (loss) to
net cash provided by operating
activities
Net income (loss) . . . . . . . . . . . . . . . $ (833) $ 615 $ 758
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities
Gain on sale of real estate . . . . . . . . . . (1,708) (365) (383)
Depreciation and amortization . . . . . . . . . 3,307 2,663 2,282
Equity in losses of partnerships . . . . . . . . 479 578 -
Provision for losses . . . . . . . . . . . . . . . 1,429 221 -
(Increase) decrease in interest
receivable . . . . . . . . . . . . . . . . . 309 (219) (380)
(Increase) decrease in other
assets . . . . . . . . . . . . . . . . . . . (785) 98 94
Increase (decrease) in other
liabilities . . . . . . . . . . . . . . . . . 468 407 (498)
Increase in interest payable . . . . . . . . . . . 156 80 137
Distributions from partnerships'
operating cash flow . . . . . . . . . . . . . 191 - 901
-------------- ------------- -------------
Net cash provided by
operating activities . . . . . . . . . . . $ 3,013 $ 4,078 $ 2,911
============== ============= =============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
41
42
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
------------------------------------------------------
1994 1993 1992
-------------- ------------- -------------
(dollars in thousands)
Schedule of noncash investing activities
Carrying value of real estate obtained
in satisfaction of notes receivable
(with carrying values totaling
$10,095 in 1994, $1,939 in 1993
and $1,616 in 1992) . . . . . . . . . . . . . . $ 11,242 $ 1,939 $ 1,616
Mortgage notes receivable from real
estate sales . . . . . . . . . . . . . . . . . . 365 638 380
Notes payable from acquisition of
real estate . . . . . . . . . . . . . . . . . . 23,631 13,441 9,000
Prior existing loan assumed by
borrower . . . . . . . . . . . . . . . . . . . . 9,000 491 3,868
Permanent write down of real estate
held for investment . . . . . . . . . . . . . . 1,229 - 2,749
Interest on wraparound mortgage loan
paid directly to underlying
lienholder . . . . . . . . . . . . . . . . . . . 855 855 855
Unrealized gains on marketable equity
securities . . . . . . . . . . . . . . . . . . . 254 2,363 -
Mortgage note receivable from
settlement of profit participation . . . . . . . 1,414 - -
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
43
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Continental Mortgage and
Equity Trust and consolidated entities (the "Trust") have been prepared in
conformity with generally accepted accounting principles, the most significant
of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES".
These, along with the remainder of the Notes to the Consolidated Financial
Statements, are an integral part of the Consolidated Financial Statements. The
data presented in the Notes to Consolidated Financial Statements are as of
December 31 of each year and for the year then ended, unless otherwise
indicated. Dollar amounts in tables are in thousands, except per share
amounts.
Certain balances for 1993 and 1992 have been reclassified to conform to the
1994 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. Continental Mortgage and Equity Trust
("CMET") is a California business trust organized on August 27, 1980. The
Trust may invest in real estate through direct ownership, leases and
partnerships and it may also invest in mortgage loans on real estate, including
first, wraparound and junior mortgage loans.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of CMET and partnerships and subsidiaries which it controls. All
intercompany transactions and balances have been eliminated.
Interest recognition on notes receivable. It is the Trust's policy to cease
recognizing interest income on notes receivable that have been delinquent for
60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable and properties held for sale to the extent
that the investment in the notes or properties exceeds the Trust's estimate of
net realizable value of the property or collateral securing each such note, or
fair value of the collateral if foreclosure is probable. In estimating net
realizable value, consideration is given to the current estimated collateral or
property value adjusted for costs to complete or improve, hold and dispose.
The cost of funds, one of the criteria used in the calculation of estimated net
realizable value (approximately 5.0% and 4.7% as of December 31, 1994 and 1993,
respectively), is based on the average cost of all capital. The provision for
losses is based on estimates, and actual losses may vary from current
estimates. Such estimates are reviewed periodically and any additional
provision determined to be necessary is charged against earnings in the period
in which it becomes reasonably estimable.
43
44
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed real estate held for sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. After foreclosure, the excess of new cost, if any,
over fair value minus estimated costs of sale is recognized in a valuation
allowance. Subsequent changes in fair value either increase or decrease such
valuation allowance. See "Allowance for estimated losses" above. Properties
held for sale are depreciated in accordance with the Trust's established
depreciation policies. See "Real estate and depreciation" below.
Annually, all foreclosed properties held for sale are reviewed by the Trust's
management and a determination is made if the held for sale classification
remains appropriate. The following are among the factors considered in
determining that a change in classification to held for investment is
appropriate: (i) the property has been held for at least one year; (ii) Trust
management has no intent to dispose of the property within the next twelve
months; (iii) the property is a "qualifying asset" as defined in the Internal
Revenue Code of 1986, as amended; (iv) property improvements have been funded;
and (v) the Trust's financial resources are such that the property can be held
long-term. The subsequent classification of property previously held for sale
to held for investment does not result in a restatement of previously reported
revenues, expenses or net income.
Real estate and depreciation. Real estate is carried at the lower of cost or
estimated net realizable value, except for foreclosed properties held for sale,
which are recorded initially at the lower of original cost or fair value minus
estimated costs of sale. Depreciation is provided for by the straight-line
method over the estimated useful lives of the assets, which range from 5 to 40
years.
Present value premiums/discounts. The Trust provides for present value
premiums and discounts on notes receivable or payable that have interest rates
that differ substantially from prevailing market rates and amortizes such
premiums and discounts by the interest method over the lives of the related
notes. The factors considered in determining a market rate for notes
receivable include the borrower's credit standing, nature of the collateral and
payment terms of the note.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment, the cost recovery or the financing method, whichever is
appropriate.
Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships which it does not
44
45
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
control. Under the equity method, the Trust's initial investment, recorded at
cost, is increased by the Trust's proportionate share of the partnership's
operating income and additional advances and decreased by the Trust's share of
the partnership's operating losses and distributions received.
Marketable equity securities. Marketable equity securities are considered to
be available-for-sale and are carried at fair value, defined as period end
closing market value. Net unrealized holding gains and losses are reported as
a separate component of shareholders' equity until realized.
Fair value of financial instruments. The Trust used the following assumptions
in estimating the fair value of its notes receivable, marketable equity
securities and notes payable. For performing notes receivable, the fair value
was estimated by discounting future cash flows using current interest rates for
similar loans. For nonperforming notes receivable, the estimated fair value
of the Trust's interest in the collateral property was used. For marketable
equity securities, fair value was based on the year end closing market price of
each security. The estimated fair values presented do not purport to present
amounts to be ultimately realized by the Trust. The amounts ultimately
realized may vary significantly from the estimated fair values presented. For
notes payable, the fair value was estimated using current rates for mortgages
with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Trust considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Earnings per share. Income (loss) per share of beneficial interest is computed
based upon the weighted average number of shares of beneficial interest
outstanding during each year.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
45
46
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
1994 1993
---------------------------------- --------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------------- ------------- ------------- -------------
Notes receivable
Performing . . . . . . . . . . . . $ 4,368 $ 4,720 $ 21,565 $ 20,584
Nonperforming, nonaccruing . . . . 4,189 6,682 12,468 13,242
--------------- ------------- ------------- -------------
$ 8,557 11,402 $ 34,033 33,826
=============== =============
Unamortized (discounts)
/premiums . . . . . . . . . . . . . (413) 157
Deferred gain . . . . . . . . . . . . (67) (67)
Interest receivable . . . . . . . . . 293 602
------------- -------------
$ 11,215 $ 34,518
============= =============
The Trust does not recognize interest income on nonperforming notes receivable.
Notes receivable are considered to be nonperforming when they become 60 days or
more delinquent. For the years 1994, 1993 and 1992, unrecognized interest
income on nonperforming notes totaled $1.3 million, $681,000 and $302,000,
respectively.
Notes receivable at December 31, 1994 mature from 1995 through 2018, with
interest rates ranging from 6.5% to 18.0% and a weighted average rate of 7.8%.
The discount is based on an imputed interest rate of 12% and premiums are based
on imputed interest rates of 10%. Notes receivable are nonrecourse and are
collateralized by real estate.
In May 1994, the Trust sold the retail portion of Forest Ridge, a foreclosed
apartment and retail property held for sale, financing the sale through
acceptance of a $365,000 purchase money mortgage. The mortgage note bears
interest at a rate of 7.5% per annum for the first three years, increasing to
8.3% per annum from May 1997 until maturity in May 2001. The note requires
monthly payments of principal and interest, currently $3,000. See NOTE 4.
"REAL ESTATE AND DEPRECIATION."
In December 1994, the Trust received payment in full on the wraparound mortgage
note secured by the Fountainview Retirement Center. The Trust received $5.0
million in cash, equal to the Trust's equity in the wraparound mortgage note.
In addition, the note agreement required that the debtor make an additional
profit participation payment equal to 62.5% of the amount by which the fair
market value of the property on the maturity date of the loan exceeded the
original loan principal balance. In settlement of the profit participation,
the borrower assigned a $1.8 million first mortgage, secured by Cypress Creek
Executive Court, an office building in Ft. Lauderdale, Florida, to the Trust
for which the Trust paid $283,000 in cash. The first mortgage bears interest
at rates ranging from 8.0% to 9.0% per annum, requires monthly payments of
principal and
46
47
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
interest, currently $15,000, and matures in June 2009. The Trust discounted
the note to yield 12.0% per annum. The Trust recognized a $1.1 million gain on
the settlement of the profit participation.
In September 1994, the Trust recorded the insubstance foreclosure of the
Circletree Apartments and the Woodbridge Apartments, the collateral properties
securing two of the Trust's mortgage notes receivable. See NOTE 4. "REAL ESTATE
AND DEPRECIATION."
In July 1993, the Trust sold the English Hills Apartments and financed the sale
in part through the acceptance of a $590,000 purchase money mortgage. The note
bears interest at rates ranging from 8.5% to 9%, requires monthly payments of
interest only from November 1993 to June 1995, payments of principal and
interest thereafter and matures in June 1999. See NOTE 4. "REAL ESTATE AND
DEPRECIATION."
The Trust received title to an office building and a 6 acre tract of land in
Houston, Texas in settlement of a $1.2 million mortgage note receivable during
1993. This settlement resulted in no loss to the Trust. See NOTE 4. "REAL
ESTATE AND DEPRECIATION."
During 1993, the Trust received cash of $1.6 million in full payment of four
mortgage notes, including the related party note described in "Related party
transaction" below.
In September 1991, the Trust funded a $2.0 million junior mortgage loan,
secured by the Aspen Village Townhomes, located in Hartland, Wisconsin. The
note accrues interest at the default interest rate of 18% per annum. The note
had an extended maturity date of April 27, 1992. On March 27, 1992, the Trust
funded an additional $150,000 junior lien mortgage loan, also secured by the
Aspen Village Townhomes. This note also bears interest at the default
interest rate of 18% per annum. This note had an extended maturity date of
September 23, 1992. The borrower failed to make the required principal
payments to the Trust on the maturity dates. The Trust continues to negotiate
with the borrower to restructure the note, with the borrower providing
additional collateral to secure these loans. If the negotiations are
unsuccessful and the Trust forecloses on the collateral property, it does not
anticipate incurring a loss in excess of previously established reserves.
At December 31, 1994, four other of the Trust's mortgage notes receivable with
principal balances totaling $4.5 million were in default. One of the notes,
with a principal balance of $1.4 million at December 31, 1994, required a
principal paydown of $200,000 in November 1994, which had not been made as of
March 17, 1995. The borrower is currently negotiating with the Trust for an 18
month extension of the note in return for a principal paydown and a pledge of
additional collateral to secure the note. The Trust does not anticipate
incurring a loss on this note as the estimated value of the property securing
the note is in excess of the carrying value of the note. The Trust is
47
48
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
evaluating its options with respect to foreclosure of the collateral properties
securing the remaining three notes, and the Trust does not anticipate incurring
losses on these notes in excess of previously established reserves.
Related party transaction. In December 1990, the Trust funded a $1.4 million
first mortgage loan to Rivertrails Development Associates, Inc., a wholly-owned
subsidiary of ART, secured by 198 developed residential lots in Ft. Worth,
Texas. The loan was paid in full in August 1993. The Trust's advisor also
serves as advisor to ART and as of March 17, 1995, ART owned approximately 35%
of the Trust's outstanding shares of beneficial interest.
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
1994 1993 1992
-------------- --------------- ----------------
Balance January 1, . . . . . . . . . . . . . . . $ 8,946 $ 9,177 $ 12,089
Amounts reclassified from
investment in partnerships . . . . . . . . . . 1,109 - -
Amounts charged off . . . . . . . . . . . . . . . (832) (231) (2,912)
-------------- --------------- ----------------
Balance December 31, . . . . . . . . . . . . . . $ 9,223 $ 8,946 $ 9,177
============== =============== ================
The provision for losses in the accompanying Consolidated Statements of
Operations consists of a $1.2 million write down of the carrying value of the
Genesee Towers office building to the amount of the nonrecourse mortgage and a
$200,000 loss on the sale of a foreclosed property held for sale in 1994, and a
$221,000 loss on the sale of a foreclosed property held for sale in 1993. See
NOTE 4. "REAL ESTATE AND DEPRECIATION" and NOTE 7. "NOTES AND INTEREST
PAYABLE."
NOTE 4. REAL ESTATE AND DEPRECIATION
In February 1994, the Trust purchased the Fountain Lake Apartments, a 166 unit
apartment complex in Texas City, Texas, for $3.3 million. The Trust paid
$237,000 in cash, assumed an existing mortgage of $2.5 million and the seller
provided additional financing of $402,000. The $2.5 million first mortgage
bears interest at a variable rate, currently 5.9% per annum, requires monthly
payments of principal and interest of $15,000 and matures in November 1998.
The $402,000 seller financing is secured by a second lien mortgage on another
of the Trust's properties, Windsor Plaza Office Building, in Windcrest, Texas.
This mortgage bears interest at a variable rate, currently 6.6% per annum,
requires monthly payments of principal and interest of $3,000 and also matures
in November 1998.
In March 1994, the Trust purchased the McCallum Crossing Apartments, a 322 unit
apartment complex in Dallas, Texas, for $7.7 million. The Trust paid $1.4
million in cash and the seller provided $6.3 million in mortgage financing.
The mortgage bears interest at rates ranging from
48
49
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
6.5% to 7.5% per annum, requires monthly payments of interest only through
March 1, 1998 and principal and interest payments of $46,000 thereafter, and
matures in March 2004.
In May 1994, the Trust purchased the Willowcreek Apartments, a 112 unit
apartment complex in El Paso, Texas, for $2.3 million in cash.
In June 1994, the Trust purchased the Park Avenue Apartments, a 108 unit
apartment complex in Clute, Texas, for $855,000 in cash.
In August 1994, the Trust purchased the Parkwood Knoll Apartments, a 178 unit
apartment complex in San Bernardino, California, for $6.4 million. The Trust
paid $1.2 million in cash and assumed the existing mortgage of $5.2 million.
The mortgage bears interest at a rate of 8.0% per annum, requires monthly
payments of principal and interest of $40,000 and matures in February 2004.
In September 1994, the Trust purchased the Pierce Towers Apartments, a 57 unit
apartment complex in Denver, Colorado, for $2.7 million. The Trust paid
$678,000 in cash and assumed the existing mortgage of $2.0 million. The
mortgage bears interest at a rate of 8.4% per annum, requires monthly payments
of principal and interest of $15,000 and matures in December 2000.
Also in September 1994, the Trust purchased the McLeod Commerce Center, a
111,115 square foot industrial facility in Orlando, Florida, for $3.2 million.
The Trust paid $1.0 million in cash and the seller provided mortgage financing
of $2.2 million. The mortgage bears interest at a rate of 9.5% per annum,
requires monthly payments of principal and interest of $19,000 and matures in
October 2001.
In December 1994, the Trust purchased The Pines Apartments, a 242 unit
apartment complex in Gainesville, Florida, for $6.2 million. The Trust paid
$923,000 in cash, assumed the existing first mortgage of $2.7 million and the
seller provided additional financing of $2.7 million. The first mortgage bears
interest at 9.6% per annum, requires monthly payments of principal and interest
of $27,000 and matures in July 2011. The $2.7 million second mortgage bears
interest at 9.5% per annum, requires monthly payments of interest only through
September 1995 and monthly payments of principal and interest of $23,000
thereafter, and matures in December 1997.
In February 1995, the Trust purchased the Sullyfield Commerce Center, a 243,813
square foot industrial facility in Chantilly, Virginia, for $11.0 million. The
Trust paid $2.2 million in cash and the seller provided mortgage financing of
$8.8 million. The mortgage bears interest at a rate of 6% per annum through
December 1996 and 9% per annum thereafter, requires monthly payments of
interest only through January 1999 and principal and interest payments of
$73,000 thereafter, and matures in January 2001.
49
50
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In March 1995, the Trust purchased the Zane May Warehouses, six industrial
warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for
$5.4 million. The Trust paid $696,000 in cash, obtained new mortgage
financing of $4.6 million and the seller provided additional financing of
$403,000. The $4.6 million mortgage bears interest at a variable rate,
currently 9.25% per annum, requires monthly payments of interest only and
matures in July 1999. The $403,000 seller financings bear interest at rates
ranging from 6% to 8% per annum, require monthly payments of principal and
interest totaling $3,000 and mature in July 1999.
In September 1994, the Trust recorded the insubstance foreclosure of the
Circletree Apartments, a 414 unit apartment complex in Waukegan, Illinois. The
Circletree Apartments had an estimated fair value, less estimated costs of
sale, of $8.1 million at the date of foreclosure, which approximated the
carrying value of the Trust's note receivable. The foreclosure resulted in no
loss to the Trust. Foreclosure proceedings were completed in October 1994.
Also in September 1994, the Trust recorded the insubstance foreclosure of
Woodbridge Apartments, a 194 unit apartment complex in Westminster, Colorado.
The Woodbridge Apartments had an estimated fair value, less estimated costs of
sale, of $3.3 million at the date of foreclosure, which exceeded the carrying
value of the Trust's mortgage note receivable. The insubstance foreclosure
resulted in no loss to the Trust. Foreclosure proceedings were completed in
February 1995.
In February 1994, the Trust sold the Kimberly Square Shopping Center, a
foreclosed property held for sale in Fort Lauderdale, Florida, for $1.0 million
in cash. No loss in excess of the reserve previously provided was incurred.
In May 1994, the Trust sold the retail portion of Forest Ridge, a foreclosed
apartment and retail property held for sale in Denton, Texas. The property was
sold for $365,000, with the Trust providing purchase money financing for the
entire sales price. The Trust recognized neither a gain or loss on the sale.
The terms of the mortgage note receivable are discussed in NOTE 3. "NOTES AND
INTEREST RECEIVABLE."
In June 1994, the Trust sold a 546 acre tract of foreclosed undeveloped land
held for sale in Morgan, Utah, for $110,000 in cash. No loss in excess of the
reserve previously provided was incurred.
Also in June 1994, the Trust sold the Oak Forest Apartments, a foreclosed
property held for sale in Tampa, Florida, for $900,000 in cash. The Trust
recognized a loss on the sale of $200,000 in excess of previously provided
reserves, which was provided by a direct charge against earnings. See NOTE 3.
"ALLOWANCE FOR ESTIMATED LOSSES."
50
51
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In December 1994, the Trust sold two single family residences located in
Arizona and South Dakota, which it had obtained through foreclosure. The Trust
received $155,000 in cash from the sales. No loss in excess of the reserves
previously established was incurred.
In March 1993, the Trust purchased the Fairways Apartments, a 152 unit
apartment complex in Longview, Texas, for $2.1 million. The Trust paid
$446,000 in cash, assumed an existing mortgage of $1.2 million and the seller
provided additional financing of $480,000.
In April 1993, the Trust purchased the Country Crossing Apartments, a 227 unit
apartment complex in Tampa, Florida, for $3.1 million. The Trust paid $239,000
in cash and assumed an existing mortgage of $2.7 million. The Trust also made
a principal paydown of $100,000 on the mortgage on the date of acquisition.
In August 1993, the Trust purchased the Camelot Apartments, a 120 unit
apartment complex in Largo, Florida, for $3.9 million. The Trust paid
$757,000 in cash and assumed an existing mortgage of $3.1 million.
In November 1993, the Trust purchased the Northgate Distribution Center, a
208,386 square foot industrial facility in Marietta, Georgia, for $4.2 million.
The Trust paid $889,000 in cash and obtained first mortgage financing for an
additional $3.3 million.
In December 1993, the Trust purchased the Somerset Apartments, a 200 unit
apartment complex in Texas City, Texas, for $3.6 million. The Trust paid
$920,000 in cash and assumed an existing first mortgage of $2.7 million.
Also in 1993, the Trust obtained title, through the settlement of a mortgage
note receivable, to Pinemont, a 19,685 square foot office building in Houston,
Texas and title to a 6 acre tract of land also in Houston, Texas. See NOTE 2.
"NOTES AND INTEREST RECEIVABLE."
In June 1993, the Trust sold Northwest Plaza, a shopping center held for sale
in Duncan, Oklahoma, for $115,000 in cash. No loss in excess of the reserve
previously established was incurred. In July 1993, the Trust sold English
Hills Apartments, a foreclosed apartment complex held for sale in Tampa,
Florida. The Trust received $47,000 in cash and provided $590,000 of purchase
money financing. The Trust recognized a loss of $221,000 on the sale, which
was provided by a direct charge against earnings. See NOTE 2. "NOTES AND
INTEREST RECEIVABLE" and NOTE 3. "ALLOWANCE FOR ESTIMATED LOSSES."
[THIS SPACE INTENTIONALLY LEFT BLANK.]
51
52
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN MARKETABLE EQUITY SECURITIES
The Trust's investments in marketable equity securities consisted of the
following:
1994 1993
--------- ---------
American Realty Trust, Inc. ("ART") . . . . . . . . $ 2,659 $ 2,480
National Income Realty Trust ("NIRT") . . . . . . . 894 891
Transcontinental Realty Investors, Inc.("TCI"). . . 788 716
--------- ---------
$ 4,341 $ 4,087
========= =========
The Trust's marketable equity securities are considered available-for-sale and
are carried at fair value (period end market value). The Trustees of the Trust
are also directors of TCI and certain officers of the Trust are also officers
of ART and TCI. The President of the Trust also serves as President of TCI and
as a director of ART. The Trust's advisor serves as advisor to ART and TCI.
Prior to March 31, 1994, the Trust's advisor also served as advisor to NIRT.
Section 5.3(g) of the Trust's Declaration of Trust limits to 18 months the
period of time that the Trust can hold an investment in an equity security.
The Trust's shareholders approved an amendment to the Trust's Declaration of
Trust allowing the Trust to hold these shares of ART, NIRT and TCI until July
30, 1996.
The Trust has margin arrangements with brokerage firms which provide for
borrowings of up to 50% of the market value of equity securities. The
borrowings under such margin arrangement are secured by equity securities of
ART, NIRT and TCI and bear interest at a rate of 6.2%. Margin borrowings
were $500,000 at December 31, 1994 and 1993 and are included in other
liabilities in the accompanying Consolidated Balance Sheets.
NOTE 6. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investment in equity method partnerships consists of the following:
1994 1993
--------- ----------
Sacramento Nine ("SAC 9") . . . . . . . . . . . . . . . . . . . . . $ 947 $ 984
Indcon, L.P. ("Indcon") . . . . . . . . . . . . . . . . . . . . . . 12,858 14,190
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1,095)
--------- ----------
$ 13,805 $ 14,079
========= ==========
The Trust, in partnership with NIRT, owns SAC 9, which in turn currently owns
two office buildings in the vicinity of Sacramento, California. The Trust has
a 30% interest in the partnership's earnings, losses and distributions.
In 1993, SAC 9 sold three of its office buildings for a total of $4.5 million.
SAC 9 received net cash of $2.5 million, of which the Trust's equity share was
$748,000, after the payoff of an existing mortgage
52
53
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
with a principal balance of $685,000. SAC 9 also provided $356,000 of purchase
money financing in conjunction with the sale of one of the buildings and
provided $887,000 of purchase money financing in conjunction with the sale of
another of the buildings. SAC 9 recognized gains totaling $1.2 million on the
sales, of which the Trust's equity share was $365,000.
The Trust and NIRT are also partners in Income Special Associates ("ISA"), a
joint venture partnership in which the Trust has a 60% interest in earnings,
losses and distributions. ISA in turn owns a 100% interest in Indcon, formerly
known as Adams Properties Associates, which owns 32 industrial warehouse
facilities. The Indcon partnership agreement requires the consent of both the
Trust and NIRT for any material changes in the operations of the partnership's
properties, including sales, refinancings and changes in property management.
The Trust, as a noncontrolling partner, accounts for its investment in Indcon
using the equity method.
In May 1994, Indcon sold one of its industrial warehouses for $4.4 million in
cash. Indcon received net cash of $2.1 million, of which the Trust's equity
share was $1.3 million, after the payoff of an existing mortgage with a
principal balance of $1.8 million and the payment of a $133,000 prepayment
penalty. Indcon recognized a gain of $962,000 on the sale, of which the
Trust's equity share was $577,000.
Set forth below are summarized financial data for the partnerships the Trust
accounts for using the equity method (unaudited):
1994 1993
------------ -----------
Real estate, net of accumulated
depreciation ($19,318 in 1994 and
$18,274 in 1993) . . . . . . . . . . . . . . . . . . . . . . . $ 46,416 $ 50,781
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 4,398 5,926
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . (25,757) (28,569)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . (335) (1,209)
------------ -----------
Partners' capital . . . . . . . . . . . . . . . . . . . . . . . . $ 24,722 $ 26,929
============ ===========
1994 1993 1992
----------- ------------ -----------
Rentals . . . . . . . . . . . . . . . . . . . . $ 7,322 $ 7,082 $ 7,567
Depreciation . . . . . . . . . . . . . . . . . (2,271) (2,016) (1,697)
Property operations . . . . . . . . . . . . . . (2,772) (2,720) (3,037)
Interest . . . . . . . . . . . . . . . . . . . (2,747) (3,050) (2,973)
----------- ------------ -----------
(Loss) before gain on sale
of real estate . . . . . . . . . . . . . . . (468) (704) (140)
Gain on sale of real estate . . . . . . . . . . 962 1,216 -
----------- ------------ -----------
Net income (loss) . . . . . . . . . . . . . . . $ 494 $ 512 $ (140)
=========== ============ ===========
53
54
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
1994 1993
---------------------------------- --------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------------- ------------- ------------- --------------
Notes payable . . . . . . . . . . . . $ 91,936 $ 97,680 $ 74,532 $ 74,370
=============== =============
Interest payable . . . . . . . . . . 572 416
------------- --------------
$ 98,252 $ 74,786
============= ==============
Scheduled principal payments on notes payable are due as follows:
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,387
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,884
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,589
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,492
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,584
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,744
--------------
$ 97,680
==============
Notes payable at December 31, 1994 bear interest at rates ranging from 3.0% to
10.8% and mature between 1995 and 2024. These notes payable are nonrecourse
and are collateralized by deeds of trust on real estate with a carrying value
of $132.1 million.
In February 1995, after determining that further investment in Genesee Towers,
an office building in Flint, Michigan, could not be justified without a
substantial modification of the mortgage debt, the Trust ceased making debt
service payments on the $8.8 million nonrecourse mortgage secured by the
property. The Trust is attempting to negotiate with the lender to modify the
mortgage. However, there can be no assurance that such negotiations will be
successful or that the Trust will continue to own the property. Accordingly,
as of December 31, 1994, the carrying value of the property was written
down by $1.2 million, which is included in the 1994 provision for losses, to
the amount of the nonrecourse mortgage.
In January 1994, the Trust obtained mortgage financing secured by the
previously unencumbered Park Lane Apartments in Dallas, Texas, in the amount of
$1.3 million. The Trust received net cash of $1.1 million. The remainder of
the financing proceeds were used to fund escrows for replacements and repairs
and to pay various closing costs associated with the financing. The $1.3
million mortgage bears interest at a rate of 8.66% per annum through January
2004 and at a variable rate thereafter and requires monthly payments of
principal and interest, currently $10,000. The note matures in February 2019.
In April 1994, the Trust obtained mortgage financing secured by the previously
unencumbered Southgate Apartments in Roundrock, Texas, in the
54
55
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
amount of $3.0 million. The Trust received net cash of $2.9 million. The
remainder of the financing proceeds were used to fund escrows for replacements
and repairs and to pay various closing costs associated with the financing.
The $3.0 million mortgage bears interest at a rate of 9.625% per annum,
requires monthly payments of principal and interest of $26,000 and matures in
May 2004.
In May 1994, the Trust obtained mortgage financing secured by the previously
unencumbered 4242 Cedar Springs Apartments in Dallas, Texas, in the amount of
$1.4 million. The Trust received net cash of $1.3 million after the payment of
various closing costs associated with the financing. The $1.4 million mortgage
bears interest at a rate of 9.9% per annum, requires monthly payments of
principal and interest of $13,000 and matures in June 2004.
In July 1994, the Trust obtained new mortgage financing secured by the Stone
Oak Place Apartments in San Antonio, Texas, in the amount of $3.3 million. The
Trust received net cash of $577,000 after the payoff of $2.5 million in
existing mortgage debt that was scheduled to mature in April 1995. The
remainder of the refinancing proceeds were used to fund escrows for
replacements and repairs and to pay various closing costs associated with the
refinancing. The new $3.3 million mortgage bears interest at a rate of 9.9%
per annum, requires monthly principal and interest payments of $31,000 and
matures in August 2004.
In December 1994, the Trust obtained mortgage financing secured by the
previously unencumbered Willow Creek Apartments in El Paso, Texas, in the
amount of $1.8 million. The Trust received net cash of $1.6 million after the
payment of various closing costs associated with the financing. The $1.8
million mortgage bears interest at a rate of 10.25% per annum, requires monthly
payments of principal and interest of $17,000 and matures in January 2002.
In September 1993, the Trust obtained mortgage financing secured by the
previously unencumbered El Chapparal Apartments in San Antonio, Texas, in the
amount of $2.7 million. The Trust received net cash of $2.4 million. The
remainder of the financing proceeds were used to fund escrows for replacements
and repairs and to pay various closing costs associated with the financings.
NOTE 8. DISTRIBUTIONS
In January 1993, the Trust's Board of Trustees approved the resumption of the
payment of quarterly distributions to shareholders. In 1994, the Trust paid
distributions of $.60 per share of beneficial interest aggregating $1.8
million. In 1993, the Trust paid distributions of $.50 per share of beneficial
interest aggregating $1.5 million.
No distributions were declared or paid in 1992.
55
56
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. DISTRIBUTIONS (Continued)
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1994 and 1993 represented a return of capital.
NOTE 9. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as advisor
to the Trust since March 28, 1989. BCM is a company owned by a trust for the
benefit of the children of Gene E. Phillips. Mr. Phillips served as a Trustee
of the Trust until December 31, 1992, as director of BCM until December 22,
1989 and as Chief Executive Officer of BCM until September 1, 1992. Mr.
Phillips serves as a representative of his children's trust which owns BCM and,
in such capacity, has substantial contact with the management of BCM and input
with respect to its performance of advisory services to the Trust.
At the Trust's annual meeting of shareholders held on March 7, 1995, the
Trust's shareholders approved the renewal of the Trust's Advisory Agreement
with BCM through the next annual meeting of the Trust's shareholders.
Subsequent renewals of the Trust's Advisory Agreement with BCM require the
approval of the Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales or acquisitions, lending, foreclosure and
borrowing activity, and other investments, and the Advisor is required to
report quarterly to the Trust's Board of Trustees on the Trust's performance
against the business plan. In addition, all transactions or investments by the
Trust shall require prior approval by the Trust's Board of Trustees unless they
are explicitly provided for in the approved business plan or are made pursuant
to authority expressly delegated to the Advisor by the Trust's Board of
Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides that the Advisor
shall be deemed to be in a fiduciary relationship to the Trust's shareholders;
contains a broad standard governing the Advisor's liability for losses by the
Trust; and contains guidelines for the Advisor's allocation of investment
opportunities as among itself, the Trust and other entities it advises.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average of the gross
asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
56
57
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by the Trust during such fiscal year
exceeds the sum of: (i) the cost of each such property as originally recorded
in the Trust's books for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (ii) capital improvements made to such
assets during the period owned by the Trust, and (iii) all closing costs,
(including real estate commissions) incurred in the sale of such property;
provided, however, no incentive fee shall be paid unless (a) such real estate
sold in such fiscal year, in the aggregate, has produced an 8% simple annual
return on the Trust's net investment including capital improvements, calculated
over the Trust's holding period before depreciation and inclusive of operating
income and sales consideration and (b) the aggregate net operating income from
all real estate owned by the Trust for each of the prior and current fiscal
years shall be at least 5% higher in the current fiscal year than in the prior
fiscal year.
Additionally, pursuant to the Advisory Agreement, BCM or an affiliate of BCM is
to receive an acquisition commission for supervising the acquisition, purchase
or long-term lease of real estate for the Trust equal to the lesser of (i) up
to 1% of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers or (ii) the compensation customarily charged in
arm's-length transactions by others rendering similar property acquisition
services as an ongoing public activity in the same geographical location and
for comparable property; provided that the aggregate purchase price of each
property (including acquisition fees and all real estate brokerage commissions)
may not exceed such property's appraised value at acquisition.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust; provided,
however, that the compensation retained by BCM or any affiliate of BCM shall
not exceed the lesser of (i) 2% of the amount of the loan committed by the
Trust or (ii) a loan brokerage and commitment fee which is reasonable and fair
under the circumstances.
The Advisory Agreement also provides that BCM or an affiliate of BCM is to
receive a mortgage or loan acquisition fee with respect to the acquisition or
purchase of any existing mortgage loan by the Trust equal to the lesser of (i)
1% of the amount of the loan purchased or (ii) a loan brokerage or commitment
fee which is reasonable and fair under the circumstances. Such fee will not be
paid in connection with the origination or funding by the Trust of any mortgage
loan.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive a
mortgage brokerage and equity refinancing fee for obtaining loans to the Trust
or refinancing on Trust properties equal to the
57
58
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
lesser of (i) 1% of the amount of the loan or the amount refinanced or (ii) a
brokerage or refinancing fee which is reasonable and fair under the
circumstances; provided, however, that no such fee shall be paid on loans from
BCM or an affiliate of BCM without the approval of the Trust's Board of
Trustees. No fee shall be paid on loan extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of certain
expenses incurred by it, in the performance of advisory services to the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust),
all or a portion of the annual advisory fee must be refunded by the Advisor to
the Trust if the Operating Expenses of the Trust (as defined in the Trust's
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust based on the book value, net asset value and net income of the Trust
during such fiscal year. The operating expenses of the Trust did not exceed
such limitation in 1994, 1993 or 1992.
Additionally, if the Trust were to request that BCM render services to the
Trust other than those required by the Advisory Agreement, BCM or an affiliate
of BCM will be separately compensated for such additional services on terms to
be agreed upon from time to time. As discussed in NOTE 10. "PROPERTY
MANAGEMENT", the Trust has hired Carmel Realty Services, Ltd. ("Carmel", Ltd.),
an affiliate of BCM, to provide property management for the Trust's properties
and, as discussed in NOTE 11. "REAL ESTATE BROKERAGE" the Trust has engaged
Carmel Realty, Inc. ("Carmel Realty"), also an affiliate of BCM, on a
non-exclusive basis, to provide brokerage services for the Trust.
NOTE 10. PROPERTY MANAGEMENT
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently Carmel, Ltd. provides such property
management services for a fee of 5% or less of the monthly gross rents
collected on the properties under its management. Carmel, Ltd. subcontracts
with other entities for the property-level management services to the Trust at
various rates. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr.
Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the
benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of nine of the Trust's commercial
properties and the industrial warehouse facilities owned by one of the real
estate partnerships in which the Trust and NIRT are partners to Carmel Realty,
which is owned by SWI. Carmel Realty is entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Carmel, Ltd.
58
59
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. REAL ESTATE BROKERAGE
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the terms of the
advisory agreement. Effective December 1, 1992, the Trust's Board of Trustees
approved the non-exclusive engagement by the Trust of Carmel Realty to perform
brokerage services for the Trust. Carmel Realty is entitled to receive a
commission for property acquisitions and sales by the Trust in accordance with
the following sliding scale of total fees to be paid by the Trust: (i) maximum
fee of 5% on the first $2.0 million of any purchase or sale transaction of
which no more than 4% would be paid to Carmel Realty or affiliates; (ii)
maximum fee of 4% on transaction amounts between $2.0 million - $5.0 million of
which no more than 3% would be paid to Carmel Realty or affiliates; (iii)
maximum fee of 3% on transaction amounts between $5.0 million - $10.0 million
of which no more than 2% would be paid to Carmel Realty or affiliates; and,
(iv) maximum fee of 2% on transaction amounts in excess of $10.0 million of
which no more than 1 1/2% would be paid to Carmel Realty or affiliates.
NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM, the Trust's advisor, and its affiliates:
1994 1993 1992
---------- --------- ---------
Fees
Advisory . . . . . . . . . . . . . . . . . . . $ 1,326 $ 1,160 $ 1,173
Real estate and mortgage
brokerage commissions . . . . . . . . . . . . 1,580 719 718
Property and construction
management fees and
leasing commissions* . . . . . . . . . . . . 570 296 209
---------- --------- ---------
$ 3,476 $ 2,175 $ 2,100
========== ========= =========
Cost reimbursements . . . . . . . . . . . . . . . $ 524 $ 453 $ 499
========== ========= =========
________________________
* Net of property management fees paid to subcontractors, other than Carmel
Realty.
NOTE 13. RENTALS UNDER OPERATING LEASES
The Trust's rental operations include the leasing of office buildings,
industrial facilities and shopping centers. The leases thereon
59
60
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. RENTALS UNDER OPERATING LEASES (Continued)
expire at various dates through 2005. The following is a schedule of minimum
future rentals on non-cancelable operating leases as of December 31, 1994:
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,565
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,553
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,447
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,106
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,248
-----------
$ 20,813
===========
NOTE 14. INCOME TAXES
For the years 1994, 1993 and 1992, the Trust has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to shareholders, provided that at least
95% of its REIT taxable income, plus 95% of its taxable income from foreclosure
property as defined in Section 857 of the Code, is distributed. See NOTE 8.
"DISTRIBUTIONS."
The Trust had a loss for federal income tax purposes in 1994, 1993 and 1992;
therefore, the Trust recorded no provision for income taxes.
The Trust's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, principally due to
the accounting for gains and losses on property sales, the difference in the
allowance for estimated losses, depreciation on owned properties and
investments in joint venture partnerships. At December 31, 1994, the Trust's
tax basis in its net assets exceeded its basis for financial statement
purposes by $2.1 million. As a result, aggregate future income for income tax
purposes will be less than such amount for financial statement purposes, and the
Trust would be able to maintain its REIT status without distributing 95% of its
financial statement income. Additionally, at December 31, 1994, the Trust had a
tax net operating loss carryforward of $50.5 million expiring through 2009.
As a result of the Trust's election to be treated as a REIT for income tax
purposes and of its intention to distribute its taxable income, if any, in
future years, no deferred tax asset, liability or valuation allowance was
recorded.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Olive Litigation. In February 1990, the Trust, together with Income
Opportunity Realty Trust ("IORT"), NIRT and TCI, three real estate entities
with, at the time, the same officers, directors or trustees and advisor as the
Trust, entered into a settlement of a class and derivative action entitled
Olive et al. v. National Income Realty Trust et al. relating to the operation
and management of each of the entities. On April 23, 1990, the court granted
final approval of the terms of the settlement.
60
61
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the court on July 1, 1994 and final court approval
was entered on December 12, 1994. The effective date of the Modification is
January 11, 1995.
The Modification, among other things, provided for the addition of three new
unaffiliated members to the Trust's Board of Trustees and sets forth new
requirements for the approval of any transactions with affiliates over the next
five years. In addition, BCM, the Trust's advisor, Mr. Phillips and William S.
Friedman, the President and Trustee of the Trust until February 24, 1994,
President of BCM until May 1, 1993 and director of BCM until December 22, 1989,
agreed to pay a total of $1.2 million to the Trust, IORT, NIRT and TCI, of
which the Trust's share is $750,000. The Trust received $187,000 in May 1994.
The remaining $563,000 is to be paid in 18 monthly installments which began
February 1, 1995.
Under the Modification, the Trust, IORT, NIRT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, IORT, NIRT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current members of the
Trust's Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Trust's Board of Trustees appointed pursuant to the
terms of the Modification that stand for reelection during the three calendar
years following the effective date of the Modification.
Pursuant to the terms of the Modification, any related party transaction which
the Trust may enter into prior to April 27, 1999, will require the unanimous
approval of the Trust's Board of Trustees. In addition, related party
transactions may only be entered into in exceptional circumstances and after a
determination by the Trust's Board of Trustees that the transaction is in the
best interests of the Trust and that no other opportunity exists that is as
good as the opportunity presented by such transaction.
The Modification also terminated a number of the provisions of the settlement,
including the requirement that the Trust, IORT, NIRT and TCI maintain a Related
Party Transaction Committee and a Litigation Committee of their respective
Boards. The court retained jurisdiction to enforce the Modification.
61
62
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
Other litigation. The Trust is also involved in various lawsuits arising in
the ordinary course of business. The Trust's management is of the opinion that
the outcome of these lawsuits would have no material impact on the Trust's
financial condition.
62
63
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
--------------------- ----------- -----------------------------------
Buildings & Buildings &
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total(1)
----------------- ------------ ---- ------------ ------------ ---- ------------ --------
(dollars in thousands)
Properties Held for Investment
------------------------------
APARTMENTS
----------
Apple Creek........... $ - $ 167 $ 946 $ 107 $ 167 $ 1,053 $ 1,220
Dallas, TX
Camelot............... 3,091 1,230 2,870 87 1,230 2,957 4,187
Largo, FL
Cedar Springs......... 1,443 372 1,117 - 372 1,117 1,489
Dallas, TX
Country Crossings..... 2,709 772 2,444 92 772 2,536 3,308
Tampa, FL
Edgewood.............. 6,707 598 6,872 1,446 598 8,318 8,916
Lansing, IL
El Chapparal.......... 2,698 279 2,821 395 279 3,216 3,495
San Antonio, TX
Fairways.............. 1,193 657 1,532 97 657 1,629 2,286
Longview, TX
Fountain Lake......... 2,496 861 2,585 - 861 2,585 3,446
Texas City, TX
McCallum Crossing..... 6,280 2,005 6,017 - 2,005 6,017 8,022
Dallas, TX
Park Avenue........... - 224 674 - 224 674 898
Clute, TX
Park Lane............. 1,238 175 978 80 175 1,058 1,233
Dallas, TX
Parkwood Knoll........ 5,176 1,659 4,975 - 1,659 4,975 6,634
San Bernardino, CA
Pierce Tower.......... 1,972 566 2,262 - 566 2,262 2,828
Denver, CO
Ravenswood............ - 130 897 1,219 130 2,116 2,246
Stratford, NJ
Rivertree............. 763 266 1,063 541 266 1,604 1,870
Hurst, TX
Somerset.............. 2,643 936 2,810 - 936 2,810 3,746
Texas City, TX
Southgate Square...... 2,983 347 1,967 181 347 2,148 2,495
Round Rock, TX
Stone Oak............. 3,286 649 2,598 98 649 2,696 3,345
San Antonio, TX
Sunset Towers......... 14,195 4,143 16,554 (510) 4,143 16,044 20,187
San Francisco, CA
The Pines............. 5,394 1,348 5,394 - 1,348 5,394 6,742
Gainesville, FL
Willow Creek.......... 1,850 608 1,832 - 608 1,832 2,440
El Paso, TX
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
----------------- ------------ ------------ -------- -----------
Properties Held for Investment
------------------------------
APARTMENTS
----------
Apple Creek........... $ 138 1971 Dec-90 5-40 years
Dallas, TX
Camelot............... 119 1975 Aug-93 5-40 years
Largo, FL
Cedar Springs......... 70 1984 Jun-92 5-40 years
Dallas, TX
Country Crossings..... 132 1973 Apr-93 5-40 years
Tampa, FL
Edgewood.............. 2,238 1972 Aug-87 5-40 years
Lansing, IL
El Chapparal.......... 833 1963 Jan-88 5-40 years
San Antonio, TX
Fairways.............. 91 1980 Mar-93 5-40 years
Longview, TX
Fountain Lake......... 58 1975 Feb-94 5-40 years
Texas City, TX
McCallum Crossing..... 126 1985 Mar-94 5-40 years
Dallas, TX
Park Avenue........... 10 1981 Jun-94 5-40 years
Clute, TX
Park Lane............. 144 1972 Dec-90 5-40 years
Dallas, TX
Parkwood Knoll........ 52 1986 Aug-94 5-40 years
San Bernardino, CA
Pierce Tower.......... 19 1958 Sep-94 5-40 years
Denver, CO
Ravenswood............ 940 1964 Feb-86 5-40 years
Stratford, NJ
Rivertree............. 468 1965 Sep-90 5-40 years
Hurst, TX
Somerset.............. 76 1985 Dec-93 5-40 years
Texas City, TX
Southgate Square...... 286 1983 Apr-91 5-40 years
Round Rock, TX
Stone Oak............. 388 1978 Mar-90 5-40 years
San Antonio, TX
Sunset Towers......... 1,406 1961 Aug-91 5-40 years
San Francisco, CA
The Pines............. 11 1972 Dec-94 5-40 years
Gainesville, FL
Willow Creek.......... 31 1972 May-94 5-40 years
El Paso, TX
63
64
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1994
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
--------------------- ----------- -----------------------------------
Buildings & Buildings &
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total(1)
----------------- ------------ ---- ------------ ------------ ---- ------------ --------
(dollars in thousands)
Properties Held for Investment - (Continued)
------------------------------
INDUSTRIAL FACILITIES
---------------------
McLeod Commerce Center $ 2,196 $ 673 $ 2,693 $ - $ 673 $ 2,693 $ 3,366
Orlando, FL
Northgate Distribution 3,204 876 3,505 176 876 3,681 4,557
Marietta, GA
OFFICE BUILDINGS
-----------------
Genesee Towers........ 8,821 212 10,367 (1,092) 212 9,275 9,487
Flint, MI
NASA.................. - 410 3,319 (524) 410 2,795 3,205
Houston, TX
Tollhill West......... 5,378 1,634 6,538 499 1,634 7,037 8,671
Dallas, TX
Windsor Plaza......... 873 1,429 4,441 (812) 1,429 3,629 5,058
Windcrest, TX
SHOPPING CENTERS
----------------
Builders Square....... 1,426 1,160 1,740 - 1,160 1,740 2,900
St. Paul, MN
Rio Pinar............. 6,182 3,190 5,205 84 3,190 5,289 8,479
Orlando, FL ------- ------ ------- ------ ------- ------- --------
94,197 27,576 107,016 2,164 27,576 109,180 136,756
------- ------ ------- ------ ------- ------- --------
Properties Held for Sale
------------------------
APARTMENTS
----------
Circletree............ 1,953 1,626 6,544 - 1,626 6,544 8,170
Waukegan, IL
Forest Ridge.......... - 212 849 70 212 919 1,131
Denton, TX
Quail Oaks............ - 90 2,160 92 90 2,252 2,342
Balch Springs, TX
Shadowridge........... - 85 338 138 85 476 561
Rock Springs, WY
Woodbridge............ 1,054 899 2,099 - 899 2,099 2,998
Westminster, CO
INDUSTRIAL FACILITY
-------------------
Ogden................. - 52 1,568 207 52 1,775 1,827
Ogden, UT
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
----------------- ------------ ------------ -------- -----------
Properties Held for Investment - (Continued)
------------------------------
INDUSTRIAL FACILITIES
---------------------
McLeod Commerce Center $ 22 1985 Sep-94 5-40 years
Orlando, FL
Northgate Distribution 114 1987 Nov-93 5-40 years
Marietta, GA
OFFICE BUILDINGS
-----------------
Genesee Towers........ 613 1968 Oct-92 5-40 years
Flint, MI
NASA................. 897 1979 Oct-85 5-40 years
Houston, TX
Tollhill West......... 759 1984 Jun-91 5-40 years
Dallas, TX
Windsor Plaza......... 1,440 1984 Nov-86 5-40 years
Windcrest, TX
SHOPPING CENTERS
----------------
Builders Square....... 149 1972 Aug-91 5-40 years
St. Paul, MN
Rio Pinar............. 420 1984 Dec-91 5-40 years
Orlando, FL ------
12,050
------
Properties Held for Sale
------------------------
APARTMENTS
----------
Circletree............ 41 1969 Sep-94 5-40 years
Waukegan, IL
Forest Ridge.......... 117 1975 Nov-91 5-40 years
Denton, TX
Quail Oaks............ 592 1982 Feb-87 5-40 years
Balch Springs, TX
Shadowridge........... 66 1973 Jan-91 5-40 years
Rock Springs, WY
Woodbridge............ 13 1968 Sep-94 5-40 years
Westminster, CO
INDUSTRIAL FACILITY
-------------------
Ogden................. 564 1979 Jan-86 5-40 years
Ogden, UT
64
65
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1994
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
--------------------- ----------- -----------------------------------
Buildings & Buildings &
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total(1)
----------------- ------------ ---- ------------ ------------ ---- ------------ --------
(dollars in thousands)
PROPERTIES HELD FOR SALE - (Continued)
OFFICE BUILDING
----------------
Pinemont Office....... $ 476 $ 175 $ 526 $ - $ 175 $ 526 $ 701
Houston, TX
LAND
----
Del Ray Forum......... - 1,202 - 12 1,214 - 1,214
Miami, FL
Northwest Crossing.... - 1,238 - - 1,238 - 1,238
Houston, TX
Round Mt.............. - 5,740 - 94 5,834 - 5,834
Austin, TX
Other................. - - 51 - - 51 51
------- ------- -------- ------ ------- -------- --------
3,483 11,319 14,135 613 11,425 14,642 26,067
------- ------- -------- ------ ------- -------- --------
$97,680 $38,895 $121,151 $2,777 $39,001 $123,822 162,823
======= ======= ======== ====== ======= ========
Allowance for estimated losses (5,125)
--------
$157,698
========
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
----------------- ------------ ------------ -------- -----------
PROPERTIES HELD
FOR SALE -
(Continued)
OFFICE BUILDING
----------------
Pinemont Office....... $ 14 1979 Dec-93 5-40 years
Houston, TX
LAND
----
Del Ray Forum......... - - May-86 -
Miami, FL
Northwest Crossing.... - - Dec-93 -
Houston, TX
Round Mt.............. - - Dec-86 -
Austin, TX
Other................. 2 1992 5-40 years
-------
1,409
-------
$13,459
=======
_____________________________
(1) The aggregate cost for federal income tax purposes is $165,261.
65
66
SCHEDULE III
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
1994 1993 1992
--------------- -------------- ---------------
(dollars in thousands)
Reconciliation of Real Estate
Balance at January 1, . . . . . . . . . . . . . . . $ 121,861 $ 102,575 $ 91,641
Additions
Acquisitions and improvements . . . . . . . . 35,107 18,608 12,950
Foreclosures . . . . . . . . . . . . . . . . . 11,242 - 1,628
Settlement of note receivable . . . . . . . . - 1,939 -
Deductions
Sales . . . . . . . . . . . . . . . . . . . . (3,558) (1,261) (894)
Permanent write-downs . . . . . . . . . . . . (1,229) - (2,750)
Refund of excess acquisition
fees . . . . . . . . . . . . . . . . . . . . (600) - -
--------------- -------------- ---------------
Balance at December 31, . . . . . . . . . . . . . . $ 162,823 $ 121,861 $ 102,575
=============== ============== ===============
Reconciliation of Accumulated
Depreciation
Balance at January 1, . . . . . . . . . . . . . . . $ 10,378 $ 8,018 $ 6,140
Additions
Depreciation . . . . . . . . . . . . . . . . . 3,214 2,431 2,020
Deductions
Sales . . . . . . . . . . . . . . . . . . . . (133) (71) (142)
--------------- -------------- ---------------
Balance at December 31, . . . . . . . . . . . . . . $ 13,459 $ 10,378 $ 8,018
=============== ============== ===============
66
67
SCHEDULE IV
CONTINENTAL MORTGAGE AND EQUITY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994
Interest Maturity
Description Rate Date Periodic Payment Terms
--------------- ------ -------- --------------------------------------------------
FIRST MORTGAGE LOANS
Alderwood 9.50% 10/95 Monthly interest only payments.
---------
secured by apartment
complex in Detroit, MI.
Buena Vista Office 12.00% 7/93 Monthly principal and interest payments
------------------ of $8,870.
secured by office
building in
Titusville, FL.
Country Elms 8.00% 5/02 Monthly interest only payments through
------------ June 1993. Monthly principal and interest
secured by mobile home payments of $3,154 beginning July 1993.
park in Galesburg, IL.
Cypress Creek 8.00% 2/09 Monthly payments of principal and interest.
------------- to
secured by office 9.00%
building in Ft.
Lauderdale, FL.
Driftwood 5.00% 5/01 Monthly interest only payments. Unpaid
--------- to accrued interest is compounded to principal
secured by apartment 10.00% monthly.
complex in Detroit, MI.
English Hills 8.50% 6/99 Monthly payments of interest only through June
------------- to 1995. Monthly payments of principal and
secured by apartment 9.00% interest thereafter. $25,000 principal pay-
complex in Tampa, FL. ment due June 1997.
Forest Ridge 7.50% 5/01 Monthly payments of principal and interest.
------------ to
secured by shopping 8.30%
center in Denton, TX.
Golden Pond Apartments 7.50% 7/97 Monthly interest only payments.
---------------------- to
secured by apartment 9.50%
complex in Phoenix, AZ.
Henderson County Ranch 12.50% 11/95 Interest and $200,000 principal payment due
---------------------- November 1,1994.
secured by ranch in
Henderson County, TX.
Residential - various 10.00% 2/05 Monthly fixed principal and
--------------------- to to interest payments.
7 mortgages secured 11.50% 11/20
by 7 homes in AZ, MA,
CO and HI.
Carrying Amounts Principal Amount of
of Mortgage Loans Subject to
Prior Face Amount Net of Discount/ Delinquent Principal
Description Liens of Mortgage Premium(1) or Interest
--------------- ------- ----------- ---------------- --------------------
(dollars in thousands)
FIRST MORTGAGE LOANS
Alderwood $ - $1,541 $ 1,541 $1,541
---------
secured by apartment
complex in Detroit, MI.
Buena Vista Office - 700 700 700
------------------
secured by office
building in
Titusville, FL.
Country Elms - 380 290 -
------------
secured by mobile home
park in Galesburg, IL.
Cypress Creek - 1,800 1,414 -
-------------
secured by office
building in Ft.
Lauderdale, FL.
Driftwood - 1,059 891 891
---------
secured by apartment
complex in Detroit, MI.
English Hills - 590 586 -
-------------
secured by apartment
complex in Tampa, FL.
Forest Ridge - 365 358 -
------------
secured by shopping
center in Denton, TX.
Golden Pond Apartments - 990 992 -
----------------------
secured by apartment
complex in Phoenix, AZ.
Henderson County Ranch - 1,500 1,400 1,400
----------------------
secured by ranch in
Henderson County, TX.
Residential - various - 754 667 -
---------------------
7 mortgages secured
by 7 homes in AZ, MA,
CO and HI.
67
68
SCHEDULE IV
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994
Interest Maturity
Description Rate Date Periodic Payment Terms
--------------- ------ -------- --------------------------------------------------
JUNIOR MORTGAGE LOANS
Aspen Village Prime 4/92 Monthly interest payments
-------------
secured by townhomes +1.50%
in Hartland, WI.
Carrying Amounts Principal Amount of
of Mortgage Loans Subject to
Prior Face Amount Net of Discount/ Delinquent Principal
Description Liens of Mortgage Premium(1) or Interest
--------------- ------- ----------- ---------------- --------------------
(dollars in thousands)
JUNIOR MORTGAGE LOANS
Aspen Village $ 3,400 $2,150 $ 2,150 $2,150
-------------
secured by townhomes
in Hartland, WI.
------- ------ ------- ------
$15,739 34,206 10,989 $6,682
======= ====== ======
Interest receivable 293
Deferred gain (67)
-------
11,215
Allowance for estimated losses (4,098)
-------
$ 7,117
=======
__________________________
(1) The aggregate cost for federal income tax purposes is $11,696.
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SCHEDULE IV
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
MORTGAGE LOANS ON REAL ESTATE
1994 1993 1992
--------------- -------------- ---------------
(dollars in thousands)
Balance at January 1, . . . . . . . . . . . . . . . . $ 33,983 $ 36,277 $ 42,424
Additions
Funding or purchase of notes
receivable . . . . . . . . . . . . . . . . . . - 52 300
Loans from sales of properties . . . . . . . . . 365 631 380
Loan received in satisfaction
of profit participation, net
of discount . . . . . . . . . . . . . . . . . 1,414 - -
Amortization of
discount/(premium) . . . . . . . . . . . . . . (93) (232) (262)
Deductions
Collections of principal . . . . . . . . . . . . (5,585) (1,743) (1,187)
Foreclosures and transfer of
title to senior lienholder . . . . . . . . . . (10,095) (993) (1,616)
Prior existing loan assumed by
by borrower . . . . . . . . . . . . . . . . . (9,000) - (3,868)
Other . . . . . . . . . . . . . . . . . . . . . - (9) 106
--------------- -------------- ---------------
Balance at December 31, . . . . . . . . . . . . . . . $ 10,989 $ 33,983 $ 36,277
=============== =============== ===============
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
___________________________________
PART III
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Trustees
The affairs of Continental Mortgage and Equity Trust (the "Trust" or the
"Registrant") are managed by a seven- member Board of Trustees. The Trustees
are elected at the annual meeting of shareholders or appointed by the incumbent
Board of Trustees and serve until the next annual meeting of shareholders or
until a successor has been elected or approved.
The Trustees of the Trust are listed below, together with their ages, terms of
service, all positions and offices with the Trust or its advisor, Basic Capital
Management, Inc. ("BCM" or the "Advisor") their principal occupations, business
experience and directorships with other companies during the last five years or
more. The designation "Affiliated", when used below with respect to a Trustee,
means that the Trustee is an officer, director or employee of the Advisor or an
officer or employee of the Trust. The designation "Independent", when used
below with respect to a Trustee, means that the Trustee is neither an officer
or employee of the Trust nor a director, officer or employee of the Advisor,
although the Trust may have certain business or professional relationships with
such Trustee as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships".
GEOFFREY C. ETNIRE: Age 46, Trustee (Independent) (since January 1993).
Attorney engaged in private practice of real estate law in
Pleasanton, California (since 1981); Licensed Real Estate Broker in
California (since 1985); Director (1985 to 1989) of Mission Valley
Bancorp; Director (1984 to 1989) and Chairman (1986 to 1989) of
Bank of Pleasanton; Managing Partner (1981 to 1988) with Smith,
Etnire, Polson & Scott law firm; Trustee (January 1993 to March
1995) of National Income Realty Trust ("NIRT"); Trustee (since
January 1993) of Income Opportunity Realty Trust ("IORT"); and
Director (since January 1993) of Transcontinental Realty Investors,
Inc. ("TCI").
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
HAROLD FURST, PH.D.: Age 78, Trustee (Independent) (since January 1995).
Executive Vice President (since 1992) of SONY Signatures;
Independent business consultant (since 1975) with emphasis on
economic and financial matters; President (1973 to 1975) of Gerson
Bakar & Associates, a property development, ownership and
management company; Former Senior Vice President of Bank of
America, N.T. and S.A. (retired 1972); Trustee (since January 1995)
of IORT; and Director (since January 1995) of TCI.
JOHN P. PARSONS: Age 66, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1984) of Pierpont
Corporation; Director of Zentrum Holdings Limited (NZ) (since
1984), the Pickford Foundation (since 1980), International
Divertissments, Ltd. (since 1986), and Lifehouse International,
Ltd.(since 1990); Trustee (since January 1995) of IORT; and
Director (since January 1995) of TCI.
BENNETT B. SIMS: Age 62, Trustee (Independent) (since April 1990).
Producer (since January 1994) for Blue Train Pictures; Author
(since 1964); Screen and Television Writer (since 1960);
Independent Marketing Consultant (since 1980) for various
companies; Professor of Dramatic Writing (since September 1987) at
Tisch School of the Arts, New York University; Trustee (April 1990
to August 1994) of NIRT; Trustee (December 1992 to August 1994) of
Vinland Property Trust ("VPT"); Trustee (since April 1990) of IORT;
and Director (since April 1990) of TCI.
TED P. STOKELY: Age 61, Trustee (Independent) (since April 1990) and Chairman
of the Board (since January 1995).
General Manager (since January 1993) of Minority and Elderly
Housing Assistance Foundation, Inc., a nonprofit corporation;
Part-time unpaid Consultant (since January 1993) and paid
Consultant (April 1992 to December 1992) of Eldercare Housing
Foundation ("Eldercare"), a nonprofit corporation engaged in the
acquisition of low income and elderly housing; President (April
1992 to April 1994) of PSA Group (real estate management and
consulting); Executive Vice President (1987 to 1991) of Key
Companies Inc., a publicly traded company that develops, acquires
and sells water and minerals; Trustee (April 1990 to August 1994)
of NIRT; Trustee (since April 1990) and Chairman of the Board
(since January 1995) of IORT; and Director (since April 1990) and
Chairman of the Board (since January 1995) of TCI.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
MARTIN L. WHITE: Age 55, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1993) of North American
Trading Company Ltd.; President and Chief Operating Officer (since
1992) of Community Based Developers, Inc.; Development Officer and
Loan Manager (1986 to 1992) of the City of San Jose, California;
Vice President and Director of Programs (1967 to 1986) of Arpact,
Inc., a government contractor for small business development and
trade; Trustee (since January 1995) of IORT; and Director (since
January 1995) of TCI.
EDWARD G. ZAMPA: Age 60, Trustee (Independent) (since January 1995).
General Partner (since 1976) of Edward G. Zampa and Company;
Trustee (since January 1995) of IORT; and Director (since January
1995) of TCI.
Litigation and Claims Involving Mr. Phillips
Gene E. Phillips served as a Trustee of the Trust until December 22, 1992, and
as a director until December 31, 1989 and Chief Executive Officer until
September 1, 1992 of BCM. Although Mr. Phillips no longer serves as an officer
or director of BCM or as a Trustee of the Trust, he does serve as a
representative of the trust established for the benefit of his children which
owns BCM and, in such capacity, has substantial contact with the management of
BCM and input with respect to its performance of advisory services for the
Trust.
Southmark Bankruptcy. Until January 1989, Mr. Phillips served as Chairman of
the Board and Director (since 1980) and President and Chief Executive Officer
(since 1981) of Southmark Corporation ("Southmark"). As a result of a deadlock
on Southmark's Board of Directors, Mr. Phillips, among others, reached an
agreement with Southmark on January 17, 1989, whereby Mr. Phillips resigned his
positions with Southmark and certain of Southmark's subsidiaries and
affiliates. Southmark filed a voluntary petition in bankruptcy under Chapter
11 of the United States Bankruptcy Code on July 14, 1989.
San Jacinto Savings Association. On November 30, 1990, San Jacinto Savings
Association ("SJSA"), a savings institution that had been owned by Southmark
since 1983 and for which Mr. Phillips served as a director from 1987 to January
1989, was placed under conservatorship of the Resolution Trust Corporation
("RTC") by federal banking authorities. On December 14, 1990, SJSA was
converted into a Federal Association and placed in receivership. On November
26, 1993, the RTC filed lawsuits in Dallas and New York City against Mr.
Phillips, six former directors, auditors and lawyers of SJSA, alleging that the
auditors and former directors could and should have stopped SJSA's poor lending
practice during the period it was owned by Southmark and that the former
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Litigation and Claims Involving Mr. Phillips (Continued)
directors abdicated their responsibility for reviewing loans during the same
period. The Office of Thrift Supervision ("OTS") also conducted a formal
examination of SJSA and its affiliates.
On November 21, 1994, Mr. Phillips entered into an agreement with the RTC and
OTS settling all claims relating to his involvement with SJSA.
Litigation Against Southmark and its Affiliates Alleging Fraud or
Mismanagement. There were several lawsuits filed against Southmark, its former
officers and directors (including Mr. Phillips) and others, alleging, among
other things, that such persons and entities engaged in conduct designed to
defraud and mislead the investing public by intentionally misrepresenting the
financial condition of Southmark. All such lawsuits have been settled or
dismissed without any findings or admissions of wrongdoing by Mr. Phillips.
THE TRUST WAS NOT A DEFENDANT IN ANY OF THESE LAWSUITS.
Litigation Relating to Lincoln Savings and Loan Association, F.A. In an action
filed in the United States District Court for the District of Arizona on behalf
of Lincoln Savings and Loan Association, F. A. ("Lincoln"), and captioned RTC
v. Charles H. Keating, Jr., et al., the RTC alleged that Charles H. Keating,
Jr. and other persons, including Mr. Phillips, fraudulently diverted funds from
Lincoln.
The RTC alleged that Mr. Phillips aided and abetted the insider defendants in a
scheme to defraud Lincoln and its regulators; that Southmark, its subsidiaries
and affiliates, including SJSA, facilitated and concealed the use of Lincoln
funds to finance the sale, at inflated prices, of assets of Lincoln's parent,
American Continental Corp. ("ACC"), in return for loans from Lincoln and
participations in contrived transactions; and that the insider defendants
caused Southmark to purchase ACC assets at inflated prices. The RTC alleged
that Lincoln and/or ACC engaged in three illegal transactions with Southmark or
its affiliates while Mr. Phillips was affiliated with Southmark. Southmark was
not a defendant in this action.
The RTC alleged nine separate causes of action against Mr. Phillips, including
aiding and abetting the violation of, and conspiracy to violate, federal and
state Racketeer Influenced and Corrupt Organizations Act ("RICO") statutes,
violations of Arizona felony statutes, common law fraud, civil conspiracy and
breach of fiduciary duty. The RTC sought to recover from the defendants more
than $1 billion, as well as treble damages under the federal RICO statute,
punitive damages of at least $100 million and attorneys' fees and costs.
On November 21, 1994, Mr. Phillips entered into an agreement with the RTC
settling all claims relating to his involvement with Lincoln.
Southmark Partnership Litigation. One of Southmark's principal businesses was
real estate syndication, and from 1981 to 1987 Southmark
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Litigation and Claims Involving Mr. Phillips (Continued)
raised over $500 million in investments from limited partners of several
hundred limited partnerships. The following two lawsuits related to and
involved such activities.
In an action filed in May 1992 in a Texas state court captioned HCW Pension
Real Estate Fund, et al. v. Phillips et al., the plaintiffs, fifteen former
Southmark related public limited partnerships, alleged that the defendants
violated the partnership agreements by charging certain administrative costs
and expenses to the plaintiffs. The complaint alleged claims for breach of
fiduciary duty, fraud and conspiracy to commit to fraud and sought to recover
actual damages of approximately $12.6 million plus punitive damages and
attorneys' fees and costs. The defendants included, among others, Mr.
Phillips. In October 1993, the court granted partial summary judgment in favor
of Mr. Phillips on the plaintiffs' breach of fiduciary duty claims. Notice of
non-suit in favor of Mr. Phillips was entered on March 9, 1994.
In an action filed in January 1993 in a Michigan state court captioned Van
Buren Associates Limited Partnership, et al. v. Friedman, et al., the
plaintiff, a former Southmark sponsored limited partnership, alleged a claim
for breach of fiduciary duty in connection with the 1988 transfer of certain
property by the partnership. The plaintiff sought damages in an unspecified
amount, plus costs and attorneys' fees. The plaintiff also sought to quiet
title to the property at issue. The defendants included, among others, Mr.
Phillips. The lawsuit was settled in November 1994.
Board Committees
The Trust's Board of Trustees held eleven meetings during 1994. For such year,
no incumbent Trustee attended fewer than 75% of the aggregate of (i) the total
number of meetings held by the Board of Trustees during the period for which he
had been a Trustee and (ii) the total number of meetings held by all committees
of the Board of Trustees on which he served during the period that he served,
except for Willie K. Davis and Randall K. Gonzalez, who each attended only one
of the meetings held by the Audit Committee.
The Trust's Board of Trustees has an Audit Committee, the function of which is
to review the Trust's operating and accounting procedures. The current members
of the Audit Committee, all of whom are Independent Trustees, are Messrs.
Etnire (Chairman), Parsons, Stokely and White. The Audit Committee met twice
during 1994.
The Trust's Board of Trustees does not have Nominating or Compensation
Committees.
Until January 11, 1995, the Trust's Board of Trustees had a Related Party
Transaction Committee which reviewed and made recommendations to the Board of
Trustees with respect to transactions involving the Trust
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Board Committees (Continued)
and any other party or parties related to or affiliated with the Trust, any of
its Trustees or any of their affiliates, and a Litigation Committee which
reviewed litigation involving Mr. Phillips. The members of each such committee
were Independent Trustees of the Trust. During 1994, the Related Party
Transaction Committee met eight times and the Litigation Committee met four
times.
The Litigation Committee evaluated the nature and quality of the allegations
made in any litigations or investigations involving Mr. Phillips in order to
assess whether BCM should continue to act as the advisor to the Trust. The
Litigation Committee, while not needing to duplicate the adjudicatory process,
was required to conduct any investigation that was appropriate and necessary to
discharge the above obligations.
The Related Party Transaction Committee and the Litigation Committee were
formed in 1990 pursuant to the settlement of the Olive litigation, as more
fully discussed in ITEM 3. "LEGAL PROCEEDINGS - Olive Litigation." In December
1994, the court approved a Modification of Stipulation of Settlement which
relieved the Trust of the requirement to maintain the two committees.
Accordingly, both of the committees were terminated by the Trust's Board of
Trustees on January 11, 1995.
Executive Officers
The following persons currently serve as executive officers of the Trust:
Oscar W. Cashwell, President; Karl L. Blaha, Executive Vice President and
Director of Commercial Management; Bruce A. Endendyk, Executive Vice President;
Randall M. Paulson, Executive Vice President; and Hamilton P. Schrauff,
Executive Vice President and Chief Financial Officer. Their positions with the
Trust are not subject to a vote of shareholders. Their ages, terms of service,
all positions and offices with the Trust or BCM, other principal occupations,
business experience and directorships with other companies during the last five
years or more are set forth below.
OSCAR W. CASHWELL: Age 67, President (since February 1994).
President (since February 1994) of IORT and TCI; President and
Director of Property and Asset Management (since January 1994) and
Assistant to the President, Real Estate Operations (July 1989 to
December 1993) of BCM; President (since February 1994) and Director
(since March 1994) of Syntek Asset Management, Inc. ("SAMI"), the
managing general partner of Syntek Asset Management, L.P.
("SAMLP"), which is the general partner of National Realty, L.P.
("NRLP") and National Operating, L.P. ("NOLP"), and a company owned
by BCM; Assistant to the President, Real Estate Operations (March
1982 to June 1989) of Southmark; and Director (since November 1992)
of American Realty Trust, Inc. ("ART").
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Executive Officers (Continued)
KARL L. BLAHA: Age 46, Executive Vice President and Director of Commercial
Management (since April 1992).
President (since October 1993) and Executive Vice President and
Director of Commercial Management (April 1992 to September 1993) of
ART; Executive Vice President and Director of Commercial Management
(since April 1992) of BCM, SAMI, IORT and TCI; Executive Vice
President (since October 1992) of Carmel Realty, Inc. ("Carmel
Realty"), a company owned by Syntek West, Inc. ("SWI"); Executive
Vice President and Director of Commercial Management (April 1992 to
February 1994) of NIRT and VPT; Partner - Director of National Real
Estate Operations of First Winthrop Corporation (August 1988 to
March 1992); Corporate Vice President of Southmark (April 1984 to
August 1988); and President of Southmark Commercial Management
(March 1986 to August 1988).
BRUCE A. ENDENDYK: Age 46, Executive Vice President (since January 1995).
President (since January 1995) of Carmel Realty; Executive Vice
President (since January 1995) of BCM, SAMI, ART, IORT and TCI;
Management Consultant (November 1990 to December 1994); Executive
Vice President (January 1989 to November 1990) of Southmark;
President and Chief Executive Officer (March 1988 to January 1989)
of Southmark Equities Corporation; and Vice President/Resident
Manager (December 1975 to March 1988) of Coldwell Banker
Commercial/Real Estate Services in Houston, Texas.
RANDALL M. PAULSON: Age 48, Executive Vice President (since January 1995).
Executive Vice President (since January 1995) of SAMI, ART, IORT
and TCI and (since October 1994) of BCM; Vice President (1993 to
1994) of GSSW, LP, a joint venture of Great Southern Life and
Southwestern Life; Vice President (1990 to 1993) of Property
Company of America Realty, Inc.; President (1990) of Paulson Realty
Group; President (1983 to 1989) of Johnstown Management Company;
and Vice President (1979 to 1982) of Lexton-Ancira.
HAMILTON P. SCHRAUFF: Age 59, Executive Vice President and Chief Financial
Officer (since October 1991).
Executive Vice President and Chief Financial Officer (since October
1991) of BCM, SAMI, ART, IORT and TCI; Executive Vice President and
Chief Financial Officer (October 1991 to February 1994) of NIRT and
VPT; Executive Vice President - Finance of Partnership Investments,
Hallwood Group (December 1990 to October 1991); Vice President -
Finance and Treasurer (Octobe 1980 to October 1990) and Vice
President - Finance (November 1976 to September 1980) of Texas Oil
& Gas Corporation; and Assistant Treasurer - Finance Manager
(February 1975 to October 1976) of Exxon U.S.A.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Officers
Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust: Thomas A. Holland, Senior Vice President and
Chief Accounting Officer; Robert A. Waldman, Senior Vice President, General
Counsel and Secretary; and Drew D. Potera, Treasurer. Their positions with the
Trust are not subject to a vote of shareholders. Their ages, terms of
service, all positions and offices with the Trust or BCM, other principal
occupations, business experience and directorships with other companies during
the last five years or more are set forth below.
THOMAS A. HOLLAND: Age 52, Senior Vice President and Chief Accounting Officer
(since July 1990).
Senior Vice President and Chief Accounting Officer (since July
1990) of BCM, SAMI, ART, IORT and TCI; Senior Vice President and
Chief Accounting Officer (July 1990 to February 1994) of NIRT and
VPT; Vice President and Controller (December 1986 to June 1990) of
Southmark; Vice President-Finance (January 1986 to December 1986)
of Diamond Shamrock Chemical Company; Assistant Controller (May
1976 to January 1986) of Maxus Energy Corporation (formerly Diamond
Shamrock Corporation); Trustee (August 1989 to June 1990) of
Arlington Realty Investors; and Certified Public Accountant (since
1970).
ROBERT A. WALDMAN: Age 42, Senior Vice President and General Counsel (since
January 1995), Vice President (December 1990 to January 1995) and Secretary
(since December 1993).
Senior Vice President and General Counsel (since January 1995);
Vice President (December 1990 to January 1995) and Secretary (since
December 1993) of IORT and TCI; Senior Vice President and General
Counsel (since January 1995), Vice President (January 1993 to
January 1995) and Secretary (since December 1989) of ART; Senior
Vice President and General Counsel (since November 1994), Vice
President and Corporate Counsel (November 1989 to November 1994)
and Secretary (since November 1989) of BCM; Senior Vice President
and General Counsel (since January 1995), Vice President (April
1990 to January 1995) and Secretary (since December 1990) of SAMI;
Vice President (December 1990 to February 1994) and Secretary
(December 1993 to February 1994) of NIRT and VPT; Director
(February 1987 to October 1989) and General Counsel and Secretary
(1985 to October 1989) of Red Eagle Resources Corporation (oil and
gas); Assistant General Counsel, Senior Staff Attorney and Staff
Attorney (1981 to 1985) of Texas International Company (oil and
gas); and Staff Attorney (1979 to 1981) of Iowa Beef Processors,
Inc.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Officers (Continued)
DREW D. POTERA: Age 35, Treasurer (since December 1990).
Treasurer (since December 1990) of IORT and TCI; Treasurer (since
August 1991) and Assistant Treasurer (December 1990 to August 1991)
of ART; Vice President, Treasurer and Securities Manager (since
July 1990) of BCM; Vice President and Treasurer (since February
1992) of SAMI; Treasurer (December 1990 to February 1994) of NIRT
and VPT; and Financial Consultant with Merrill Lynch, Pierce,
Fenner & Smith Incorporated (June 1985 to June 1990).
In addition to the foregoing officers, the Trust has several vice presidents
and assistant secretaries who are not listed herein.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the Trust's Trustees, executive
officers, and any persons holding more than ten percent of the Trust's shares
of beneficial interest are required to report their ownership of the Trust's
shares and any changes in that ownership to the Securities and Exchange
Commission (the "Commission"). Specific due dates for these reports have been
established and the Trust is required to report any failure to file by these
dates during 1994. All of these filing requirements were satisfied by its
Trustees and executive officers and ten percent holders. In making these
statements, the Trust has relied on the written representations of its
incumbent Trustees and executive officers and its ten percent holders and
copies of the reports that they have filed with the Commission.
The Advisor
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by a contractual advisor under
the supervision of the Trust's Board of Trustees. The duties of the advisor
include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities
for the Trust. The advisor also serves as a consultant to the Trusts' Board of
Trustees in connection with the business plan and investment policy decisions.
BCM has served as the Trust's advisor since March 1989. BCM is a corporation
of which Messrs. Cashwell, Blaha, Endendyk, Paulson and Schrauff serve as
executive officers. BCM is owned by a trust for the benefit of the children of
Mr. Phillips. Prior to December 22, 1989, Mr. Phillips also served as a
director of BCM, and until September 1, 1992, as Chief Executive Officer of
BCM. Mr. Phillips serves as a representative of his children's trust which
owns BCM and, in such capacity, has substantial contact with the management of
BCM and input with respect to its performance of advisory services to the
Trust.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
At the Trust's annual meeting of shareholders held on March 7, 1995, the
Trust's shareholders approved the renewal of the Trust's Advisory Agreement
with BCM through the next annual meeting of the Trust's shareholders.
Subsequent renewals of the Trust's Advisory Agreement with BCM require the
approval of the Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales or acquisitions, lending, foreclosure and
borrowing activity, and other investments, and the Advisor is required to
report quarterly to the Trust's Board of Trustees on the Trust's performance
against the business plan. In addition, all transactions or investments by the
Trust shall require prior approval by the Trust's Board of Trustees unless they
are explicitly provided for in the approved business plan or are made pursuant
to authority expressly delegated to the Advisor by the Trust's Board of
Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides that the Advisor
shall be deemed to be in a fiduciary relationship to the Trust's shareholders;
contains a broad standard governing the Advisor's liability for losses by the
Trust; and contains guidelines for the Advisor's allocation of investment
opportunities as among itself, the Trust and other entities it advises.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average of the gross
asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by the Trust during such fiscal year
exceeds the sum of: (i) the cost of each such property as originally recorded
in the Trust's books for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (ii) capital improvements made to such
assets during the period owned by the Trust, and (iii) all closing costs,
(including real estate commissions) incurred in the sale of such property;
provided, however, no incentive fee shall be paid unless (a) such real estate
sold in such fiscal year, in the aggregate, has produced an 8% simple annual
return on the Trust's net investment including capital improvements, calculated
over the Trust's holding period before depreciation and inclusive of operating
income and sales consideration and (b) the aggregate net
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
operating income from all real estate owned by the Trust for each of the prior
and current fiscal years shall be at least 5% higher in the current fiscal year
than in the prior fiscal year.
Additionally, pursuant to the Advisory Agreement, BCM or an affiliate of BCM is
to receive an acquisition commission for supervising the acquisition, purchase
or long-term lease of real estate for the Trust equal to the lesser of (i) up
to 1% of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers or (ii) the compensation customarily charged in
arm's-length transactions by others rendering similar property acquisition
services as an ongoing public activity in the same geographical location and
for comparable property; provided that the aggregate purchase price of each
property (including acquisition fees and all real estate brokerage commissions)
may not exceed such property's appraised value at acquisition.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust; provided,
however, that the compensation retained by BCM or any affiliate of BCM shall
not exceed the lesser of (i) 2% of the amount of the loan committed by the
Trust or (ii) a loan brokerage and commitment fee which is reasonable and fair
under the circumstances.
The Advisory Agreement also provides that BCM or an affiliate of BCM is to
receive a mortgage or loan acquisition fee with respect to the acquisition or
purchase of any existing mortgage loan by the Trust equal to the lesser of (i)
1% of the amount of the loan purchased or (ii) a loan brokerage or commitment
fee which is reasonable and fair under the circumstances. Such fee will not be
paid in connection with the origination or funding by the Trust of any mortgage
loan.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive a
mortgage brokerage and equity refinancing fee for obtaining loans to the Trust
or refinancing on Trust properties equal to the lesser of (i) 1% of the amount
of the loan or the amount refinanced or (ii) a brokerage or refinancing fee
which is reasonable and fair under the circumstances; provided, however, that
no such fee shall be paid on loans from BCM or an affiliate of BCM without the
approval of the Trust's Board of Trustees. No fee shall be paid on loan
extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of certain
expenses incurred by it, in the performance of advisory services to the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust),
all or a portion of the annual advisory fee must be refunded by the Advisor to
the Trust if the Operating Expenses of the Trust (as defined in the Trust's
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust based on the book value, net asset
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
value and net income of the Trust during such fiscal year. The operating
expenses of the Trust did not exceed such limitation in 1994, 1993 or 1992.
Additionally, if the Trust were to request that BCM render services to the
Trust other than those required by the Advisory Agreement, BCM or an affiliate
of BCM will be separately compensated for such additional services on terms to
be agreed upon from time to time. As discussed below, under "Property
Management", the Trust has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."),
an affiliate of BCM, to provide property management for the Trust's properties.
Also as discussed below, under "Real Estate Brokerage" the Trust has engaged
Carmel Realty, also an affiliate of BCM, on a non-exclusive basis, to perform
brokerage services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of the Trust.
The directors and principal officers of BCM are set forth below.
RYAN T. PHILLIPS: Director
OSCAR W. CASHWELL: President and Director of Property and
Asset Management
KARL L. BLAHA: Executive Vice President and Director of
Commercial Management
BRUCE A. ENDENDYK: Executive Vice President
RANDALL M. PAULSON: Executive Vice President
HAMILTON P. SCHRAUFF: Executive Vice President and Chief Financial
Officer
CLIFFORD C. TOWNS, JR: Executive Vice President, Finance
STEPHEN R. YOUNG: Executive Vice President and Director of
Acquisitions
THOMAS A. HOLLAND: Senior Vice President and Chief Accounting
Officer
ROBERT A. WALDMAN: Senior Vice President, Secretary and General
Counsel
DREW D. POTERA: Vice President, Treasurer and Securities
Manager
Ryan T. Phillips is Gene E. Phillips' son. Gene E. Phillips serves as a
representative of the trust established for the benefit of his
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
children which owns BCM and, in such capacity, Mr. Phillips has substantial
contact with the management of BCM and input with respect to its performance of
advisory services to the Trust.
Property Management
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently Carmel, Ltd. provides such property
management services for a fee of 5% or less of the monthly gross rents
collected on the properties under its management. Carmel, Ltd. subcontracts
with other entities for the provision of the property-level management services
to the Trust at various rates. The general partner of Carmel, Ltd. is BCM.
The limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the
sole shareholder, (ii) Mr. Phillips and, (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of nine of the Trust's commercial properties and the
industrial warehouse facilities owned by one of the real estate partnerships in
which the Trust and NIRT are partners to Carmel Realty which is a company owned
by SWI. Carmel Realty is entitled to receive property and construction
management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Carmel, Ltd.
Real Estate Brokerage
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the terms of the
advisory agreement. Effective December 1, 1992, the Trust's Board of Trustees
approved the non-exclusive engagement by the Trust of Carmel Realty to perform
brokerage services for the Trust. Carmel Realty is entitled to receive a
commission for property acquisitions and sales by the Trust in accordance with
the following sliding scale of total fees to be paid by the Trust: (i) maximum
fee of 5% on the first $2.0 million of any purchase or sale transaction of
which no more than 4% would be paid to Carmel Realty or affiliates; (ii)
maximum fee of 4% on transaction amounts between $2.0 million - $5.0 million of
which no more than 3% would be paid to Carmel Realty or affiliates; (iii)
maximum fee of 3% on transaction amounts between $5.0 million - $10.0 million
of which no more than 2% would be paid to Carmel Realty or affiliates; and,
(iv) maximum fee of 2% on transaction amounts in excess of $10.0 million of
which no more than 1 1/2% would be paid to Carmel Realty or affiliates.
ITEM 11. EXECUTIVE COMPENSATION
The Trust has no employees, payroll or benefit plans and pays no compensation
to the executive officers of the Trust. The executive officers of the Trust
who are also officers or employees of BCM, the Trust's Advisor, are compensated
by the Advisor. Such executive officers of the Trust perform a variety of
services for the Advisor and the
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ITEM 11. EXECUTIVE COMPENSATION (Continued)
amount of their compensation is determined solely by the Advisor. BCM does not
allocate the cash compensation of its officers among the various entities for
which it serves as advisor. See Item 10. "TRUSTEES, EXECUTIVE OFFICERS AND
ADVISOR OF THE REGISTRANT - The Advisor" for a more detailed discussion of the
compensation payable to BCM by the Trust.
The only remuneration paid by the Trust is to the Trustees who are not officers
or directors of BCM or its affiliated companies. The Independent Trustees (i)
review the business plan of the Trust to determine that it is in the best
interest of the Trust's shareholders, (ii) review the Trust's contract with the
advisor, (iii) supervise the performance of the Trust's advisor and review the
reasonableness of the compensation which the Trust pays to its advisor in terms
of the nature and quality of services performed, (iv) review the reasonableness
of the total fees and expenses of the Trust and (v) select, when necessary, a
qualified independent real estate appraiser to appraise properties acquired by
the Trust. The Independent Trustees receive compensation in the amount of
$6,000 per year, plus reimbursement for expenses. In addition, each
Independent Trustee receives (i) $3,000 per year for each committee of the
Trust's Board of Trustees on which he serves, (ii) $2,500 per year for each
committee chairmanship and (iii) $1,000 per day for any special services
rendered by him to the Trust outside of his ordinary duties as Trustee, plus
reimbursement of expenses.
During 1994, the Trust's Board of Trustees established a Screening Committee
for the purpose of interviewing candidates for nomination to the Trust's Board
of Trustees pursuant to the Modification of Stipulation of Settlement of the
Olive Litigation. In connection with such services each member of the
Screening Committee received a $5,000 fee.
During 1994, $91,500 was paid to the Independent Trustees in total Trustees'
fees for all services, including the annual fee for service during the period
June 1, 1994 through May 31, 1995, and 1994 special service fees as follows:
Willie K. Davis, $13,250; Geoffrey C. Etnire, $16,250; Randall K. Gonzalez,
$10,500; Dan L. Johnston, $8,500; A. Bob Jordan, $10,250; Raymond V.J. Schrag,
$8,750; Bennett B. Sims, $12,000; and Ted P. Stokely, $12,000.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
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ITEM 11. EXECUTIVE COMPENSATION (Continued)
Performance Graph
The following performance graph compares the cumulative total shareholder
return on the Trust's shares of beneficial interest with the Standard & Poor's
500 Stock Index ("S&P 500 Index") and the National Association of Real Estate
Investment Trusts, Inc. Hybrid REIT Total Return Index ("REIT Index"). The
comparison assumes that $100 was invested on December 31, 1989 in the Trust's
shares of beneficial interest and in each of the indices and further assumes
the reinvestment of all dividends. Past performance is not necessarily an
indicator of future performance.
COMPARISON OF FIVE YEAR
CUMULATIVE TOTAL RETURN
(CHART)
======================================================================================================================
1989 1990 1991 1992 1993 1994
----------------------------------------------------------------------------------------------------------------------
THE TRUST 100 60 110 99 213 259
----------------------------------------------------------------------------------------------------------------------
S&P 500 INDEX 100 97 126 136 150 152
----------------------------------------------------------------------------------------------------------------------
REIT INDEX 100 72 100 116 141 147
======================================================================================================================
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of the Trust's shares of beneficial interest, both
beneficially and of record, both individually and in the aggregate, for those
persons or entities known by the Trust to be beneficial owners of more than 5%
of its shares of beneficial interest as of the close of business on March 17,
1995.
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
--------------------------- ----------------- ----------
American Realty Trust, Inc. 1,029,010 35.3%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Basic Capital Management, Inc. 237,699 8.1%
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231
_________________________
(1) Percentages are based upon 2,918,121 shares of beneficial interest
outstanding at March 17, 1995.
Security Ownership of Management. The following table sets forth the ownership
of the Trust's shares of beneficial interest, both beneficially and of record,
both individually and in the aggregate for the Trustees and executive officers
of the Trust as of the close of business on March 17, 1995.
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
--------------------------- ----------------- ----------
All Trustees and Executive 1,266,709 (2) 43.4%
Officers as a group
(12 individuals)
___________________________
* Less than 1%.
(1) Percentage is based upon 2,918,121 shares of beneficial interest issued
and outstanding at March 17, 1995.
(2) Includes 1,029,010 shares owned by ART and 237,699 shares owned by BCM of
which the executive officers of the Trust may be deemed to be beneficial
owners by virtue of their positions as executive officers or director of
ART and BCM. The Trust's executive officers disclaim beneficial
ownership of such shares.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Trust's Board of Trustees voted to retain BCM as the
Trust's advisor. See ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF
THE REGISTRANT - The Advisor." BCM is a company of which Messrs. Cashwell,
Blaha, Endendyk, Paulson and Schrauff serve as executive officers. Mr.
Phillips served as a director of BCM until December 22, 1989 and as Chief
Executive Officer of BCM until September 1, 1992. BCM is owned by a trust for
the benefit of the children of Mr. Phillips. Mr. Phillips serves as a
representative of his children's trust which owns BCM and, in such capacity,
has substantial contact with the management of BCM and input with respect to
its performance of advisory services to the Trust.
Since February 1, 1991, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel, Ltd. provides such property
management services. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole
shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of nine of the Trust's commercial properties and the
industrial warehouse facilities owned by one of the real estate partnerships in
which the Trust and NIRT are partners to Carmel Realty, which is a company
owned by SWI.
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. Since December 1, 1992, the Trust has engaged, on a non-exclusive
basis, Carmel Realty to perform brokerage services to the Trust. Carmel Realty
is a company owned by SWI.
The Trustees and officers of the Trust also serve as trustees or directors and
officers of IORT and TCI. The Trustees owe fiduciary duties to such entities
as well as to the Trust under applicable law. IORT and TCI have the same
relationship with BCM as the Trust. Mr. Phillips is a general partner of
SAMLP, the general partner of NRLP and NOLP. BCM performs certain
administrative functions for NRLP and NOLP on a cost-reimbursement basis. BCM
also serves as advisor to ART. Mr. Phillips served as Chairman of the Board
and as a director of ART until November 16, 1992. Messrs. Blaha, Endendyk,
Paulson and Schrauff serve as executive officers of ART and Mr. Cashwell serves
as a director of ART.
From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid
Consultant and since January 1, 1993 as a part-time unpaid Consultant for
Eldercare, a nonprofit corporation engaged in the acquisition of low income and
elderly housing. Eldercare has a revolving loan commitment from SWI, of which
Mr. Phillips is the sole shareholder. Eldercare filed for bankruptcy
protection in July 1993, and was dismissed from bankruptcy on October 12, 1994.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties. The
Trust's management believes that all of the related party transactions
represented the best investments available at the time and were at least as
advantageous to the Trust as could have been obtained from unrelated third
parties.
As more fully described in ITEM 2. "PROPERTIES - Real Estate," the Trust is
engaged with NIRT in the Sacramento Nine and Indcon, L.P. partnerships.
In September 1990, the Trust's Board of Trustees authorized the purchase of up
to $2.0 million of the common shares of ART through negotiated or open market
transactions. The Trust's advisor also serves as advisor to ART and at March
17, 1995 ART owned approximately 35% of the Trust's outstanding shares of
beneficial interest. At December 31, 1994, the Trust owned 204,522 shares of
ART common stock which the Trust had purchased in open market transactions in
1990 and 1991 at a total cost to the Trust of $1.6 million. At December 31,
1991, the market value of such shares of ART common stock had declined to $1.1
million. The Trust determined that such decline represented an other than
temporary decline in the market value of the ART common stock and accordingly,
recognized a loss of $521,000. At December 31, 1994, the market value of the
ART shares was $2.7 million. See ITEM 2. "PROPERTIES -Equity Investments in
Real Estate Entities."
In December 1990, the Trust's Board of Trustees authorized the purchase of up
to $1.0 million of the shares of beneficial interest of NIRT and up to $1.0
million of the shares of TCI common stock through negotiated or open market
transactions. The Trustees of the Trust serve as directors of TCI. The
officers of the Trust also serve as officers of TCI. BCM, the Trust's advisor,
also serves as advisor to TCI. Until March 31, 1994, BCM served as advisor to
NIRT. At December 31, 1994, the Trust owned 76,893 shares of beneficial
interest of NIRT at a total cost of $415,000 and 53,000 shares of TCI common
stock at a total cost of $235,000 all of which the Trust had purchased in open
market transactions in 1990 and 1991. At December 31, 1994, the market value
of the NIRT shares was $894,000 and the market value of the TCI common stock
was $788,000. See ITEM 2. "PROPERTIES - Equity Investments in Real Estate
Entities."
In 1994, the Trust paid BCM and its affiliates $1.3 million in advisory fees,
$1.6 million in real estate and mortgage brokerage commissions and $570,000 in
property and construction management fees and leasing commissions (net of
property management fees paid to subcontractors, other than Carmel Realty). In
addition, also as provided in the Advisory Agreement, BCM received cost
reimbursements from the Trust of $524,000 in 1994.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions
The Trust's Declaration of Trust provides that:
"The Trustees shall not...purchase, sell or lease any Real Properties or
Mortgages to or from...the Advisor or any of [its] Affiliates," and that
[t]he Trustees shall not...make any loan to...the Advisor or any of [its]
Affiliates."
The Declaration of Trust further provides that:
"The Trust shall not purchase or lease, directly or indirectly, any Real
Property or purchase any Mortgage from the Advisor or any affiliated
Person, or any partnership in which any of the foregoing may also be a
general partner, and the Trust will not sell or lease, directly or
indirectly, any of its Real Property or sell any Mortgage to any of the
foregoing Persons." The Declaration of Trust further provides that "the
Trust shall not directly or indirectly, engage in any transaction with
any Trustee, officer or employee of the Trust or any director, officer or
employee of the Advisor...or of any company or other organization of
which any of the foregoing is an Affiliate, except for...[among other
things] transactions with...the Advisor or Affiliates thereof involving
loans, real estate brokerage services, real property management services,
the servicing of Mortgages, the leasing of real or personal property, or
other services, provided such transactions are on terms not less
favorable to the Trust than the terms on which nonaffiliated parties are
then making similar loans or performing similar services for comparable
entities in the same area and are not entered into on an exclusive
basis."
The Declaration of Trust further provides that:
"The Trustees shall not...invest in any equity Security, including the
shares of other REITs for a period in excess of 18 months, except for
shares of a qualified REIT subsidiary, as defined in Section 856(i) of
the Internal Revenue Code, and regular or residual interests in
REMICs...[or] acquire Securities in any company holding investments or
engaging in activities prohibited by this Section..."
The Declaration of Trust defines "Affiliate" as follows:
"As to any Person, any other Person who owns beneficially, directly or
indirectly, 1% or more of the outstanding capital stock, shares, or
equity interests of such Person or of any other Person which controls, is
controlled by, or is under common control with, such Person or is an
officer, retired officer, director, employee, partner, or trustee
(excluding independent trustees not otherwise affiliated with the entity)
of such Person or of any other Person which controls, is controlled by,
or is under common control with, such Person."
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
From 1990 until January 1995, all related party transactions that the Trust
entered into were required to be reviewed by the Related Party Transaction
Committee of the Trust's Board of Trustees to determine whether such
transactions were (i) fair to the Trust and (ii) were permitted by the Trust's
governing documents. Each of the members of the Related Party Transaction
Committee was a Trustee who was not an officer, director or employee of BCM,
the Trust's advisor, and was not an officer or employee of the Trust. The
Related Party Transaction Committee was terminated by the Trust's Board of
Trustees on January 11, 1995.
Pursuant to the terms of the Modification of Stipulation of Settlement of the
Olive Litigation, which became effective on January 11, 1995, any related party
transaction which the Trust may enter into prior to April 27, 1999, will
require the unanimous approval of the Trust's Board of Trustees. In addition,
related party transactions may only be entered into in exceptional
circumstances and after a determination by the Trust's Board of Trustees that
the transaction is in the best interests of the Trust and that no other
opportunity exists that is as good as the opportunity presented by such
transaction.
___________________________________
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets -
December 31, 1994 and 1993
Consolidated Statements of Operations -
Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows -
Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this report:
Exhibit
Number Description
------- ---------------------------------------------------------------------
3.0 Second Amended and Restated Declaration of Trust (incorporated by
reference to the Registrant's Current Report on Form 8-K dated
August 14, 1987).
3.1 Amendment No. 1 to Second Amended and Restated Declaration of Trust,
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated July 5, 1989) reporting change in name of Trust.
3.2 Amendment No. 2 to Second Amended and Restated Declaration of Trust
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated March 22, 1990) reporting deletion of liquidation
provision.
3.3 Restated Trustees' Regulations dated as of April 21, 1989
(incorporated by reference to the current report on Form 8-K dated
March 24, 1989).
10.0 Advisory Agreement dated as of December 1, 1992, between Continental
Mortgage and Equity Trust and Basic Capital Management, Inc.
(incorporated by reference to Exhibit No. 10.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992).
10.1 Advisory Agreement dated as of March 7, 1995, between Continental
Mortgage and Equity Trust and Basic Capital Management, Inc., filed
herewith.
10.2 Brokerage Agreement dated as of December 1, 1992, between
Continental Mortgage and Equity Trust and Carmel Realty, Inc.
(incorporated by reference to Exhibit No. 10.3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992).
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
Exhibit
Number Description
------- ---------------------------------------------------------------------
10.3 Brokerage Agreement dated as of February 11, 1994, between
Continental Mortgage and Equity Trust and Carmel Realty, Inc.,
(incorporated by reference to Exhibit No. 10.3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993).
10.4 Brokerage Agreement dated as of February 11, 1995, between
Continental Mortgage and Equity Trust and Carmel Realty, Inc., filed
herewith.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated September 29, 1994, was filed
with respect to Item 2, "Acquisition or Disposition of Assets",
which reports the acquisition of the McLeod Commerce Center and
which was amended on Form 8-K/A, filed November 18, 1994.
A Current Report on Form 8-K, dated December 22, 1994, was filed
with respect to Item 2, "Acquisition or Disposition of Assets",
which reports the acquisition of The Pines Apartments and which was
amended on Form 8-K/A, filed February 10, 1995.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONTINENTAL MORTGAGE AND EQUITY TRUST
Dated: March 28, 1995 By: /s/ Oscar W. Cashwell
----------------------------------- -------------------------------------
Oscar W. Cashwell
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By: By: /s/ Ted P. Stokely
-------------------------------------- -------------------------------------
Geoffrey C. Etnire Ted P. Stokely
Trustee Trustee
By: /s/ Harold Furst, Ph.D. By:
-------------------------------------- -------------------------------------
Harold Furst, Ph.D. Martin L. White
Trustee Trustee
By: /s/ John P. Parsons By: /s/ Edward G. Zampa
-------------------------------------- -------------------------------------
John P. Parsons Edward G. Zampa
Trustee Trustee
By: /s/ Bennett B. Sims
--------------------------------------
Bennett B. Sims
Trustee
By: /s/ Hamilton P. Schrauff By: /s/ Thomas A. Holland
-------------------------------------- -------------------------------------
Hamilton P. Schrauff Thomas A. Holland
Executive Vice President and Senior Vice President and
Chief Financial Officer Chief Accounting Officer
Dated: March 28, 1995
-----------------------------------
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CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1994
Exhibit
Number Description Page
------- ----------------- ------
10.1 Advisory Agreement dated as of March 7, 1995, 94
between Continental Mortgage and Equity Trust
and Basic Capital Management, Inc.
10.4 Brokerage Agreement dated as of February 11, 119
1995, between Continental Mortgage and Equity
Trust and Carmel Realty, Inc.
27.0 Financial Data Schedule. 128
93
EX-10.1
2
ADVISORY AGREEMENT
1
EXHIBIT 10.1
ADVISORY AGREEMENT
BETWEEN
CONTINENTAL MORTGAGE AND EQUITY TRUST
AND
BASIC CAPITAL MANAGEMENT, INC.
THIS AGREEMENT dated as of March 7, 1995, between Continental Mortgage
and Equity Trust, a California real estate investment trust (the "Trust"), and
Basic Capital Management, Inc., a Nevada corporation (the "Advisor").
W I T N E S S E T H:
WHEREAS:
1. The Trust owns a complex, diversified portfolio of real estate,
mortgages and other assets, including many non-performing or troubled assets.
2. The Trust is an active real estate investment trust with funds
available for investment primarily in the acquisition of income-producing real
estate and to a lesser extent in short and medium term mortgages.
3. The Advisor and its employees have extensive experience in the
administration of real estate assets and the origination, structuring and
evaluation of real estate and mortgage investments.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties agree as
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2
follows:
1. DUTIES OF THE ADVISOR. Subject to the supervision of the Board of
Trustees, the Advisor will be responsible for the day-to-day operations of the
Trust and, subject to Section 17 hereof, shall provide such services and
activities relating to the assets, operations and business plan of the Trust as
may be appropriate, including:
(a) preparing and submitting an annual budget and business plan
for approval by the Board of the Trust (the "Business Plan");
(b) using its best efforts to present to the Trust a continuing
and suitable investment program consistent with the investment policies and
objectives of the Trust as set forth in the Business Plan;
(c) using its best efforts to present to the Trust investment
opportunities consistent with the Business Plan and such investment program as
the Trustees may adopt from time to time;
(d) furnishing or obtaining and supervising the performance of
the ministerial functions in connection with the administration of the
day-to-day operations of the Trust, including the investment of reserve funds
and surplus cash in short-term money market investments;
(e) serving as the Trust's investment and financial advisor and
providing research, economic, and statistical data in connection with the
Trust's investments and investment and
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3
financial policies;
(f) on behalf of the Trust, investigating, selecting and
conducting relations with borrowers, lenders, mortgagors, brokers, investors,
builders, developers and others; provided however, that the Advisor shall not
retain on the Trust's behalf any consultants or third party professionals,
other than legal counsel, without prior Board approval;
(g) consulting with the Trustees and furnishing the Trustees
with advice and recommendations with respect to the making, acquiring (by
purchase, investment, exchange, or otherwise), holding, and disposition
(through sale, exchange, or otherwise) of investments consistent with the
Business Plan of the Trust;
(h) obtaining for the Trustees such services as may be required
in acquiring and disposing of investments, disbursing and collecting the funds
of the Trust, paying the debts and fulfilling the obligations of the Trust, and
handling, prosecuting, and settling any claims of the Trust, including
foreclosing and otherwise enforcing mortgage and other liens securing
investments;
(i) obtaining for and at the expense of the Trust such services
as may be required for property management, loan disbursements, and other
activities relating to the investments of the Trust, provided, however, the
compensation for such services shall be agreed to by the Trust and the service
provider;
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4
(j) advising the Trust in connection with public or private sales
of shares or other securities of the Trust, or loans to the Trust, but in no
event in such a way that the Advisor could be deemed to be acting as a broker
dealer or underwriter;
(k) quarterly and at any time requested by the Trustees, making
reports to the Trustees regarding the Trust's performance to date in relation
to the Trust's approved Business Plan and its various components , as well as
the Advisor's performance of the foregoing services;
(l) making or providing appraisal reports, where appropriate, on
investments or contemplated investments of the Trust;
(m) assisting in preparation of reports and other documents
necessary to satisfy the reporting and other requirements of any governmental
bodies or agencies and to maintain effective communications with shareholders
of the Trust; and
(n) doing all things necessary to ensure its ability to render
the services contemplated herein, including providing office space and office
furnishings and personnel necessary for the performance of the foregoing
services as Advisor, all at its own expense, except as otherwise expressly
provided for herein.
2. NO PARTNERSHIP OR JOINT VENTURE. The Trust and the Advisor are not
partners or joint venturers with each other,
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5
and nothing herein shall be construed so as to make them such partners or joint
venturers or impose any liability as such on either of them.
3. RECORDS. At all times, the Advisor shall keep proper books of account
and records of the Trust's affairs which shall be accessible for inspection by
the Trust at any time during ordinary business hours.
4. ADDITIONAL OBLIGATIONS OF THE ADVISOR. The Advisor shall refrain from
any action (including, without limitation, furnishing or rendering services to
tenants of property or managing or operating real property) that would (a)
adversely affect the status of the Trust as a real estate investment trust, as
defined and limited in Sections 856-860 of the Internal Revenue Code, (b)
violate any law, rule, regulation, or statement of policy of any governmental
body or agency having jurisdiction over the Trust or over its securities, (c)
cause the Trust to be required to register as an investment company under the
Investment Company Act of 1940, or (d) otherwise not be permitted by the
Declaration of Trust of the Trust.
5. BANK ACCOUNTS. The Advisor may establish and maintain one or more
bank accounts in its own name, and may collect and deposit into any such
account or accounts, and disburse from any such account or accounts, any money
on behalf of the Trust, under such terms and conditions as the Trustees may
approve, provided that no funds in any such account shall be commingled
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with funds of the Advisor; and the Advisor shall from time to time render
appropriate accounting of such collections and payments to the Trustees and to
the auditors of the Trust.
6. BOND. The Advisor shall maintain a fidelity bond with a responsible
surety company in such amount as may be required by the Trustees from time to
time, covering all directors, officers, employees, and agents of the Advisor
handling funds of the Trust and any investment documents or records pertaining
to investments of the Trust. Such bond shall inure to the benefit of the Trust
in respect to losses of any such property from acts of such directors,
officers, employees, and agents through theft, embezzlement, fraud, negligence,
error, or omission or otherwise, the premium for said bond to be at the expense
of the Trust.
7. INFORMATION FURNISHED ADVISOR. The Trustees shall have the right to
change the Business Plan at any time, effective upon receipt by the Advisor of
notice of such change. The Trust shall furnish the Advisor with a certified
copy of all financial statements, a signed copy of each report prepared by
independent certified public accountants, and such other information with
regard to the Trust's affairs as the Advisor may from time to time reasonably
request.
8. CONSULTATION AND ADVICE. In addition to the services
described above, the Advisor shall consult with the Trustees, and shall, at the
request of the Trustees or the officers of the Trust, furnish advice and
recommendations with respect to
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any aspect of the business and affairs of the Trust, including any factors that
in the Advisor's best judgment should influence the policies of the Trust.
9. ANNUAL BUSINESS PLAN AND BUDGET. No later than January 15th of each
year, the Advisor shall submit to the Trustees a written Business Plan for the
current Fiscal Year of the Trust. Such Business Plan shall include a
twelve-month forecast of operations and cash flow with explicit assumptions and
a general plan for asset sales or acquisitions, lending, foreclosure and
borrowing activity, other investments or ventures and proposed securities
offerings or repurchases or any proposed restructuring of the Trust. To the
extent possible, the Business Plan shall set forth the Advisor's
recommendations and the basis therefor with respect to all material investments
of the Trust. Upon approval by the Board of Trustees, the Advisor shall be
authorized to conduct the business of the Trust in accordance with the explicit
provisions of the Business Plan, specifically including the borrowing, leasing,
maintenance, capital improvements, renovations and sale of investments set
forth in the Business Plan. Any transaction or investment not explicitly
provided for in the approved Business Plan shall require the prior approval of
the Board of Trustees unless made pursuant to authority expressly delegated to
the Advisor. Within sixty (60) days of the end of each calendar quarter, the
Advisor shall provide the Board of Trustees with a report comparing the
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Trust's actual performance for such quarter against the Business Plan.
10. DEFINITIONS. As used herein, the following terms shall have the
meanings set forth below:
(a) "Affiliate" shall mean, as to any Person, any other Person
who owns beneficially, directly, or indirectly, 1% or more of the outstanding
capital stock, shares or equity interests of such Person or of any other
Person which controls, is controlled by, or is under common control with such
Person or is an officer, retired officer, director, employee, partner, or
trustee (excluding non-interested trustees not otherwise affiliated with the
entity) of such Person or of any other Person which controls, is controlled by,
or is under common control with, such Person.
(b) "Appraised Value" shall mean the value of a Real Property
according to an appraisal made by an independent qualified appraiser who is a
member in good standing of the American Institute of Real Estate Appraisers and
is duly licensed to perform such services in accordance with the applicable
state law, or, when pertaining to Mortgage Loans, the value of the underlying
property as determined by the Advisor.
(c) "Book Value" of an asset or assets shall mean the value of
such asset or assets on the books of the Trust, before provision for
amortization, depreciation, depletion or valuation reserves and before
deducting any indebtedness or other liability in respect thereof, except that
no asset shall
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be valued at more than its fair market value as determined by the Trustees.
(d) "Book Value of Invested Assets" shall mean the Book Value of
the Trust's total assets (without deduction of any liabilities), but excluding
(i) goodwill and other intangible assets, (ii) cash, and (iii) cash equivalent
investments with terms which mature in one year or less.
(e) "Business Plan" shall mean the Trust's investment policies
and objectives and the capital and operating budget based thereon, approved by
the Board as thereafter modified or amended.
(f) "Fiscal Year" shall mean any period for which an income tax
return is submitted to the Internal Revenue Service and which is treated by the
Internal Revenue Service as a reporting period.
(g) "Gross Asset Value" shall mean the total assets of the Trust
after deduction of allowance for amortization, depreciation or depletion and
valuation reserves.
(h) "Mortgage Loans" shall mean notes, debentures, bonds, and
other evidences of indebtedness or obligations, whether negotiable or
non-negotiable, and which are secured or collateralized by mortgages, including
first, wraparound, construction and development, and junior mortgages.
(i) "Net Asset Value" shall mean the Book Value of all the assets
of the Trust minus all the liabilities of the Trust.
(j) "Net Income" for any period shall mean the Net
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Income of the Trust for such period computed in accordance with generally
accepted accounting principles after deduction of the Gross Asset Fee, but
before deduction of the Net Income Fee, as set forth in Sections 11(a) and
11(b), respectively, herein, and inclusive of gain or loss of the sale of
assets.
(k) "Net Operating Income" shall mean rental income less property
operating expenses.
(l) "Person" shall mean and include individuals, corporations,
limited partnerships, general partnerships, joint stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments
and agencies and political subdivisions thereof.
(m) "Real Property" shall mean and include land, rights in land,
leasehold interests (including but not limited to interests of a lessor or
lessee therein), and any buildings, structures, improvements, fixtures, and
equipment located on or used in connection with land, leasehold interests, and
rights in land or interests therein.
All calculations made pursuant to this Agreement shall be
based on statements (which may be unaudited, except as provided herein)
prepared on an accrual basis consistent with generally accepted accounting
principles, regardless of whether the Trust may also prepare statements on a
different basis. All other terms shall have the same meaning as set forth in
the Trust's Declaration of Trust and Trustees' Regulations.
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11. ADVISORY COMPENSATION.
(a) Gross Asset Fee. On or before the twenty-eighth day of each
month during the term hereof the Trust shall pay to the Advisor, as
compensation for the basic management and advisory services rendered to the
Trust hereunder, a fee at the rate of .0625% per month of the average of the
Gross Asset Value of the Trust at the beginning and at the end of the next
preceding calendar month. Without negating the provisions of Sections 18, 19,
22 and 23 hereof, the annual rate of the Gross Asset Fee shall be .75% per
annum.
(b) Net Income Fee. As an incentive for successful investment
and management of the Trust's assets, the Advisor will be entitled to receive a
fee equal to 7.5% per annum of the Trust's Net Income for each Fiscal Year or
portion thereof for which the Advisor provides services. To the extent the
Trust has Net Income in a quarter, the 7.5% Net Income Fee is to be paid
quarterly on or after the third business day following the filing of the report
on Form 10-Q with the Securities and Exchange Commission, except for the
payment for the fourth quarter, ended December 31, which is to be paid on or
after the third business day following the filing of the report on Form 10-K
with the Securities and Exchange Commission. The 7.5% Net Income Fee is to be
cumulative within any Fiscal Year, such that if the Trust has a loss in any
quarter during the Fiscal Year, each subsequent quarter's payment shall be
adjusted to maintain the 7.5% per annum rate, with final settlement being made
with the fourth quarter
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payment and in accordance with audited results for the Fiscal Year. The 7.5%
Net Income Fee is not cumulative from year to year.
(c) Acquisition Commission. For supervising the acquisition,
purchase or long term lease of Real Property for the Trust, the Advisor is to
receive an Acquisition Commission equal to the lesser of (i) up to 1% of the
cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated
brokers; or (ii) the compensation customarily charged in arm's-length
transactions by others rendering similar property acquisition services as an
ongoing public activity in the same geographical location and for comparable
property. The aggregate of each purchase price of each property (including the
Acquisition Commissions and all real estate brokerage fees) may not exceed such
property's Appraised Value at acquisition.
(d) Incentive Sales Compensation. To encourage periodic sales of
appreciated Real Property at optimum value and to reward the Advisor for
improved performance of the Trust's Real Property, the Trust shall pay to the
Advisor, on or before the 45th day after the close of each Fiscal Year, an
incentive fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all Real Property sold by the Trust during such Fiscal Year
exceeds the sum of: (i) the cost of each such Real Property as originally
recorded in the Trust's books for tax purposes (without deduction for
depreciation, amortization or reserve for losses), (ii) capital
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improvements made to such assets during the period owned by the Trust, and
(iii) all closing costs, (including real estate commissions) incurred in the
sale of such Real Property; provided, however, no incentive fee shall be paid
unless (a) such Real Property sold in such Fiscal Year, in the aggregate, has
produced an 8% simple annual return on the Trust's net investment including
capital improvements, calculated over the Trust's holding period before
depreciation and inclusive of operating income and sales consideration and (b)
the aggregate Net Operating Income from all Real Property owned by the Trust
for all of the prior Fiscal Year and the current Fiscal Year shall be at least
5% higher in the current Fiscal Year than in the prior Fiscal Year.
(e) Mortgage or Loan Acquisition Fees. For the acquisition or
purchase from an unaffiliated party of any existing mortgage or loan by the
Trust, the Advisor or an Affiliate is to receive a Mortgage or Loan Acquisition
Fee equal to the lesser of (a) 1% of the amount of the mortgage or loan
purchased by the Trust or (b) a brokerage or commitment fee which is reasonable
and fair under the circumstances. Such fee will not be paid in connection with
the origination or funding by the Trust of any mortgage loan.
(f) Mortgage Brokerage and Equity Refinancing Fees. For obtaining
loans to the Trust or refinancing on Trust properties, the Advisor or an
Affiliate is to receive a Mortgage Brokerage and Equity Refinancing Fee equal
to the
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lesser of (a) 1% of the amount of the loan or the amount refinanced or (b) a
brokerage or refinancing fee which is reasonable and fair under the
circumstances; provided, however that no such fee shall be paid on loans from
the Advisor or an Affiliate without the approval of the Board of Trustees. No
fee shall be paid on loan extensions.
12. LIMITATION ON THIRD PARTY MORTGAGE PLACEMENT FEES. The Advisor or any
of its Affiliates shall pay to the Trust, one-half of any compensation received
by the Advisor or any such Affiliate from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust, provided,
however, the compensation retained by the Advisor or Affiliate shall not exceed
the lesser of (a) 2% of the amount of the loan committed by the Trust or (b) a
loan brokerage and commitment fee which is reasonable and fair under the
circumstances.
13. STATEMENTS. The Advisor shall furnish to the Trust not later than the
tenth day of each calendar month, beginning with the second calendar month of
the term of this Agreement, a statement showing the computation of the fees, if
any, payable in respect to the next preceding calendar month (or, in the case
of incentive compensation, for the preceding Fiscal Year, as appropriate) under
the Agreement. The final settlement of incentive compensation for each Fiscal
Year shall be subject to adjustment in accordance with, and upon completion of,
the annual audit of the Trust's financial statements; any payment
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by the Trust or repayment by the Advisor that shall be indicated to be
necessary in accordance therewith shall be made promptly after the completion
of such audit and shall be reflected in the audited statements to be published
by the Trust.
14. COMPENSATION FOR ADDITIONAL SERVICES. If and to the extent that the
Trust shall request the Advisor or any director, officer, partner, or employee
of the Advisor to render services for the Trust other than those required to be
rendered by the Advisor hereunder, such additional services, if performed, will
be compensated separately on terms to be agreed upon between such party and the
Trust from time to time. In particular, but without limitation, if the Trust
shall request that the Advisor perform property management, leasing, loan
disbursement or similar functions, the Trust and the Advisor shall enter into a
separate agreement specifying the obligations of the parties and providing for
reasonable additional compensation to the Advisor for performing such services.
15. EXPENSES OF THE ADVISOR. Without regard to the amount of compensation
or reimbursement received hereunder by the Advisor, the Advisor shall bear the
following expenses:
(a) employment expenses of the personnel employed by the Advisor
(including Trustees, officers, and employees of the Trust who are directors,
officers, or employees of the Advisor or of any company that controls, is
controlled by, or is under
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common control with the Advisor), including, but not limited to, fees,
salaries, wages, payroll taxes, travel expenses, and the cost of employee
benefit plans and temporary help expenses except for those personnel expenses
described in Sections 16(e) and (p);
(b) advertising and promotional expenses incurred in seeking
investments for the Trust;
(c) rent, telephone, utilities, office furniture and furnishings,
and other office expenses of the Advisor and the Trust, except as any of such
expenses relates to an office maintained by the Trust separate from the office
of the Advisor; and
(d) miscellaneous administrative expenses relating to performance
by the Advisor of its functions hereunder.
16. EXPENSES OF THE TRUST. The Trust shall pay all of its expenses not
assumed by the Advisor, including without limitation, the following expenses:
(a) the cost of money borrowed by the Trust;
(b) income taxes, taxes and assessments on real property, and all
other taxes applicable to the Trust;
(c) legal, auditing, accounting, underwriting, brokerage,
listing, registration and other fees, printing, and engraving and other
expenses, and taxes incurred in connection with the issuance, distribution,
transfer, registration, and stock exchange listing of the Trust's securities;
(d) fees, salaries, and expenses paid to officers, and
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employees of the Trust who are not directors, officers or employees of the
Advisor, or of any company that controls, is controlled by, or is under common
control with the Advisor;
(e) expenses directly connected with the origination or purchase
of Mortgage Loans and with the acquisition, disposition, and ownership of real
estate equity interests or other property (including the costs of foreclosure,
insurance, legal, protective, brokerage, maintenance, repair, and property
improvement services) and including all compensation, traveling expenses, and
other direct costs associated with the Advisor's employees or other personnel
engaged in (i) real estate transaction legal services, (ii) internal auditing,
(iii) foreclosure and other mortgage finance services, (iv) sale or
solicitation for sale of mortgages, (v) engineering and appraisal services, and
(vi) transfer agent services;
(f) expenses of maintaining and managing real estate equity
interests;
(g) insurance, as required by the Trustees (including Trustees'
liability insurance);
(h) the expenses of organizing, revising, amending, converting,
modifying, or terminating the Trust;
(i) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the
Trustees to holders of securities of the Trust;
(j) all expenses connected with communications to
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holders of securities of the Trust and the other bookkeeping and clerical work
necessary in maintaining relations with holders of securities, including the
cost of printing and mailing certificates for securities and proxy solicitation
materials and reports to holders of the Trust's securities;
(k) the cost of any accounting, statistical, bookkeeping or
computer equipment or computer time necessary for maintaining the books and
records of the Trust and for preparing and filing Federal, State and Local tax
returns;
(l) transfer agent's, registrar's, and indenture trustee's fees
and charges;
(m) legal, accounting, investment banking, and auditing fees and
expenses charged by independent parties performing these services not otherwise
included in clauses (c) and (e) of this Section 16;
(n) expenses incurred by the Advisor, arising from the sales of
Trust properties, including those expenses related to carrying out foreclosure
proceedings;
(o) commercially reasonable fees paid to the Advisor for efforts
to liquidate mortgages before maturity, such as the solicitation of offers and
negotiation of terms of sale;
(p) costs and expenses connected with computer services,
including but not limited to employee or other personnel compensation, hardware
and software costs, and related development and installation costs associated
therewith;
(q) costs and expenses associated with risk management
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(i.e. insurance relating to the Trust's assets );
(r) loan refinancing compensation; and
(s) expenses associated with special services requested by the
Trustees pursuant to Section 14 hereof.
17. OTHER ACTIVITIES OF ADVISOR. The Advisor, its officers, directors, or
employees or any of its Affiliates may engage in other business activities
related to real estate investments or act as advisor to any other person or
entity (including another real estate investment trust), including those with
investment policies similar to the Trust, and the Advisor and its officers,
directors, or employees and any of its Affiliates shall be free from any
obligation to present to the Trust any particular investment opportunity that
comes to the Advisor or such persons, regardless of whether such opportunity is
in accordance with the Trust's Business Plan. However, to minimize any
possible conflict, the Advisor shall consider the respective investment
objectives of, and the appropriateness of a particular investment to each such
entity in determining to which entity a particular investment opportunity
should be presented. If appropriate to more than one entity, the Advisor shall
present the investment opportunity to the entity that has had sufficient
uninvested funds for the longest period of time.
18. LIMITATION ON OPERATING EXPENSES. To the extent that the operating
expenses of the Trust for any Fiscal Year exceeds the limitation set forth in
the Trust's Declaration of Trust as amended from time to time, or any similar
limitation (if
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contained) in a successor Declaration of Trust or Certificate of Incorporation,
the Advisor shall refund to the Trust such portion of its fees payable
hereunder as may be required by such Section.
19. TERM; TERMINATION OF AGREEMENT. This Agreement shall continue in
force until the next Annual Meeting of Shareholders of the Trust, and,
thereafter, it may be renewed from year to year, subject to any required
approval of the Shareholders of the Trust and, if any Trustee is an Affiliate
of the Advisor, the approval of a majority of the Trustees who are not so
affiliated. Notice of renewal shall be given in writing by the Trustees to the
Advisor not less than 60 days before the expiration of this Agreement or of any
extension thereof. This Agreement may be terminated for any reason without
penalty upon 60 days' written notice by the Trust to the Advisor or 120 days'
written notice by the Advisor to the Trust, in the former case by the vote of a
majority of the Trustees who are not Affiliates of the Advisor or by the vote
of holders of a majority of the outstanding shares of the Trust.
Notwithstanding the foregoing, however, in the event of any material change in
the ownership, control or management of the Advisor, the Trust may terminate
this Agreement without penalty and without advance notice to the Advisor.
20. AMENDMENTS. This Agreement shall not be changed, modified, terminated
or discharged in whole or in part except by an instrument in writing signed by
both parties hereto, or their respective successors or assigns, or otherwise as
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provided herein.
21. ASSIGNMENT. This Agreement shall not be assigned by the Advisor
without the prior consent of the Trust. The Trust may terminate this Agreement
in the event of its assignment by the Advisor without the prior consent of the
Trust. Such an assignment or any other assignment of this Agreement by the
Advisor shall bind the assignee hereunder in the same manner as the Advisor is
bound hereunder. This Agreement shall not be assignable by the Trust without
the consent of the Advisor, except in the case of assignment by the Trust to a
corporation, association, trust, or other organization that is a successor to
the Trust. Such successor shall be bound hereunder and by the terms of said
assignment in the same manner as the Trust is bound hereunder.
22. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Trustees, this
Agreement shall be and become terminated immediately upon written notice of
termination from the Trustees to the Advisor if any of the following events
shall occur:
(a) If the Advisor shall violate any provision of this Agreement,
and after notice of such violation shall not cure such default within 30 days;
or
(b) If the Advisor shall be adjudged bankrupt or insolvent by a
court of competent jurisdiction, or an order shall be made by a court of
competent jurisdiction for the appointment of a receiver, liquidator, or
trustee of the Advisor or of all or substantially all of its property by
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reason of the foregoing, or approving any petition filed against the Advisor
for its reorganization, and such adjudication or order shall remain in force or
unstayed for a period of 30 days; or
(c) If the Advisor shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the Federal
bankruptcy laws, or for relief under any law for the relief of debtors, or
shall consent to the appointment of a receiver of itself or of all or
substantially all its property, or shall make a general assignment for the
benefit of its creditors, or shall admit in writing its inability to pay its
debts generally, as they become due.
The Advisor agrees that if any of the events specified in
subsections (b) and (c) of this Section 22 shall occur, it will give written
notice thereof to the Trustees within seven days after the occurrence of such
event.
23. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, pursuant to Sections 19, 21 or 22 hereof, the
Advisor shall not be entitled to compensation for further services hereunder
but shall be paid all compensation accruing to the date of termination. The
Advisor shall forthwith upon such termination:
(a) pay over to the Trust all monies collected and held for the
account of the Trust pursuant to this Agreement;
(b) deliver to the Trustees a full accounting, including a
statement showing all payments collected by it and
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a statement of any monies held by it, covering the period following the date
of the last accounting furnished to the Trustees; and
(c) deliver to the Trustees all property and documents of the
Trust then in the custody of the Advisor.
24. MISCELLANEOUS. The Advisor shall be deemed to be in a fiduciary
relationship to the shareholders of the Trust. The Advisor assumes no
responsibility under this Agreement other than to render the services called
for hereunder in good faith, and shall not be responsible for any action of the
Trustees in following or declining to follow any advice or recommendations of
the Advisor. Neither the Advisor nor any of its shareholders, directors,
officers, or employees shall be liable to the Trust, the Trustees, the holders
of securities of the Trust or to any successor or assign of the Trust for any
losses arising from the operation of the Trust if the Advisor had determined,
in good faith, that the course of conduct which caused the loss or liability
was in the best interests of the Trust and the liability or loss was not the
result of negligence or misconduct by the Advisor. However, in no event will
the directors, officers or employees of the Advisor be personally liable for
any act or failure to act unless it was the result of such person's willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
25. NOTICES. Any notice, report, or other communication
required or permitted to be given hereunder shall be in writing unless some
other method of giving such notice, report, or
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other communication is accepted by the party to whom it is given, and shall be
given by being delivered at the following addresses of the parties hereto:
The Trustees and/or the Trust:
Continental Mortgage and Equity Trust
Search Plaza
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President
The Advisor:
Basic Capital Management, Inc.
Search Plaza
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: Executive Vice President
and Chief Financial Officer
Either party may at any time give notice in writing to the other party
of a change of its address for the purpose of this Section 25.
26. HEADINGS. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.
27. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
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Texas.
28. EXECUTION. This instrument is executed and made on behalf of the
Trust by an officer of the Trust, not individually but solely as an officer and
the obligations under this Agreement are not binding upon, nor shall resort be
had to the private property of, any of the Trustees, shareholders, officers,
employees, or agents of the Trust personally, but bind only the Trust property.
IN WITNESS WHEREOF, CONTINENTAL MORTGAGE AND EQUITY TRUST, and BASIC
CAPITAL MANAGEMENT, INC., by their duly authorized officers, have signed these
presents all as of the day and year first above written.
CONTINENTAL MORTGAGE AND EQUITY TRUST
By: /s/ Oscar W. Cashwell
----------------------------------
Oscar W. Cashwell
President
BASIC CAPITAL MANAGEMENT, INC.
By: /s/ Hamilton P. Schrauff
---------------------------------
Hamilton P. Schrauff
Executive Vice President
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EX-10.4
3
BROKERAGE AGREEMENT
1
EXHIBIT 10.4
BROKERAGE AGREEMENT
BETWEEN
CONTINENTAL MORTGAGE AND EQUITY TRUST
AND
CARMEL REALTY, INC.
THIS BROKERAGE AGREEMENT dated as of February 11, 1995, between
Continental Mortgage and Equity Trust, a California business trust (the
"Trust"), and Carmel Realty, Inc. (the "Broker"), a Texas corporation.
WITNESSETH:
WHEREAS:
1. The Trust is an active real estate investment trust with funds
available for investment primarily in the acquisition of real estate.
2. The Trust owns a diversified portfolio of real estate which includes
properties which by reason of their size, location and quality, require special
efforts to sell and the Trust desires to sell certain of such property and
acquire additional property from time to time.
3. The Broker and its principal officers have extensive experience in the
sale and purchase of real estate assets.
4. The Broker is duly registered as a real estate broker, and is duly
qualified to procure the listing of real estate for sale, lease or rental, and
prospective purchasers, lessees, and
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renters therefor, and has the good will of, and a reputation for dealing with,
the public, and also maintains an office, properly equipped and staffed,
suitable to serving as a real estate broker.
5. In consideration for the non-exclusive opportunity offered hereby, the
Broker is willing to make an effort to sell any of the Trust's properties,
regardless of the size, quality or location of such properties.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties agree as follows:
1. PROPERTY SALES. The Trust shall make available to the Broker on a
non-exclusive basis information on real estate assets the Trust desires to sell
and Broker shall work diligently and with its best efforts to sell such real
estate.
2. PROPERTY ACQUISITIONS. Broker shall attempt to locate real estate
assets suitable for purchase by the Trust within the parameters set forth by
the Trust from time to time.
3. NO PARTNERSHIP OR JOINT VENTURE. The Trust and the Broker are not
partners or joint venturers with each other, and nothing herein shall be
construed so as to make them such partners or joint venturers or impose any
liability as such on either of them.
4. INDEPENDENT CONTRACTOR. The Broker will be performing professional
services for the Trust as an independent contractor and the Broker will not be
subject to the will and control of the Trust nor will the Trust have the right
to control either the method and the result of the services so performed. The
Trust will not be held responsible for the collection and payment of taxes or
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contributions of any nature on behalf of the Broker including, but not by way
of limitation, contributions on behalf of the Broker for Federal Social
Security (F.I.C.A.) for Federal and State Unemployment Compensation, for State
Workman's Compensation Insurance, for State Real Estate Commission
Registration, for State, County and Municipal Occupational Licensing or for
insurance, annuity, or retirement program in which the Broker may participate.
5. BROKERAGE SERVICES. The Broker will perform professional services as
a Registered Real Estate Broker, and the Broker will devote sufficient time and
services on behalf of the Trust to accomplish the mutual purposes of the
parties.
6. HOLD HARMLESS. The Broker will hold the Trust harmless against all
suits, claims, and obligations which the Broker may incur in performing
services as an independent contractor, and the Broker shall have no right to
bind, contract, or obligate the Trust in the performance of services.
7. LEGAL COMPLIANCE. It is understood that the Broker will abide by all
laws, ethical practices and regulations promulgated by the applicable state
real estate commissions or other regulatory bodies.
8. PURCHASE COMMISSION. For locating and negotiating the lease or
purchase of any real property by the Trust, the Broker is to receive a purchase
commission in accordance with the fee schedule attached as Exhibit A to this
Agreement. The aggregate of each purchase price of each property (including
the purchase commission
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paid to the Broker and the Trust's advisor) may not exceed such property's
appraised value at acquisition. Any commission which is paid to the Broker by
the seller shall be credited against the commission to be paid by the Trust
hereunder.
9. REAL ESTATE SALES COMMISSION. For the sale of each property, the
Broker is to receive a real estate sales commission in accordance with the fee
schedule attached as Exhibit A to this Agreement.
10. EXPENSES OF THE BROKER. Without regard to the amount of compensation
received hereunder by the Broker, the Broker shall bear the following expenses:
(a) employment expenses of the personnel employed by the Broker,
including, but not limited to, fees, salaries, wages, payroll taxes, travel
expenses, and the cost of employee benefit plans and temporary help expenses;
(b) advertising and promotional expenses incurred in seeking
investment opportunities for the Trust;
(c) rent, telephone, utilities, office furniture and
furnishings, and other office expenses of the Broker; and
(d) miscellaneous administrative expenses relating to
performance by the Broker of its functions hereunder.
11. OTHER ACTIVITIES OF BROKER. Nothing herein contained shall prevent the
Broker or any of its officers, directors, or employees or any of its affiliates
from engaging in other business activities related to real estate investments
or from acting as broker to any other person or entity (including another real
estate investment
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5
trust), even though having investment policies similar to the Trust, and the
Broker and its officers, directors, or employees. The Broker shall have a duty
to present to the Trust any investment opportunity that comes to the Broker or
any of its affiliates if such opportunity is within the Trust's investment
policies.
12. TERM; TERMINATION OF AGREEMENT. This Agreement shall continue in force
for a period of twelve months, and thereafter it may be renewed from year to
year, subject to the approval of a majority of the Trustees of the Trust who
are not affiliated with the Broker. Notice of renewal shall be given in writing
by the Trustees to the Broker not less than 60 days before the expiration of
this Agreement or of any extension thereof. Notwithstanding any other provision
to the contrary, this Agreement may be terminated for any reason without
penalty upon written notice by the Trust to the Broker or written notice by the
Broker to the Trust, in the former case by the vote of a majority of the
Trustees who are not affiliates of the Broker.
13. AMENDMENTS. This Agreement shall not be changed, modified, terminated
or discharged in whole or in part except by an instrument in writing signed by
both parties hereto, or their respective successors or assigns, or otherwise as
provided herein.
14. ASSIGNMENT. This Agreement shall not be assigned by the Broker without
the prior consent of the Trust. The Trust may terminate this Agreement in the
event of its assignment by the Broker without the prior consent of the Trust.
Such an assignment or any other assignment of this Agreement shall bind the
assignee
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6
hereunder in the same manner as the Broker is bound hereunder. This Agreement
shall not be assignable by the Trust without the consent of the Broker, except
in the case of assignment by the Trust to a corporation, association, trust, or
other organization that is a successor to the Trust. Such successor shall be
bound hereunder and by the terms of said assignment in the same manner as the
Trust is bound hereunder.
15. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Trustees, this
Agreement shall be and become terminated immediately upon written notice of
termination from the Trustees to the Broker if any of the following events
shall occur:
(a) If the Broker shall violate any provision of this Agreement,
and after notice of such violation shall not cure such default within 30 days;
or
(b) If the Broker shall be adjudged bankrupt or insolvent by a
court of competent jurisdiction, or an order shall be made by a court of
competent jurisdiction for the appointment of a receiver, liquidator, or
trustee of the Broker or of all or substantially all of its property by reason
of the foregoing, or approving any petition filed against the Broker for its
reorganization, and such adjudication or order shall remain in force or
unstayed for a period of 30 days; or
(c) If the Broker shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the Federal
bankruptcy laws, or for relief under any law for the relief of debtors, or
shall consent to the
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7
appointment of a receiver of itself or of all or substantially all its
property, or shall make a general assignment for the benefit of its creditors,
or shall admit in writing its inability to pay its debts generally, as they
become due.
The Broker agrees that if any of the events specified in subsections (b)
and (c) of this Section shall occur, it will give written notice thereof to the
Trustees within seven days after the occurrence of such event.
16. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, pursuant to Sections 12, 14 or 15 hereof, the
Broker shall not be entitled to compensation for further services hereunder but
shall be paid all compensation earned to the date of termination.
17. MISCELLANEOUS. The Broker assumes no responsibility under this
Agreement other than to render the services called for hereunder in good faith,
and shall not be responsible for any action of the Trust in following or
declining to follow any advice or recommendations of the Broker. Neither the
Broker nor any of its shareholders, directors, officers, or employees shall be
liable to the Trust, the Trustees, the holders of securities of the Trust or to
any successor or assign of the Trust except by reason of acts constituting bad
faith, willful misfeasance, gross negligence, or reckless disregard of their
duties.
18. NOTICES. Any notice, report, or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report, or other
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8
communication is accepted by the party to whom it is given, and shall be given
by being delivered at the following addresses of the parties hereto:
The Trust:
Continental Mortgage and Equity Trust
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President
The Broker:
Carmel Realty, Inc.
10670 North Central Expressway
Suite 640
Dallas, Texas 75231
Attention: Chief Executive Officer
Either party may at any time give notice in writing to the other party of a
change of its address for the purpose of this Section.
19. HEADINGS. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.
20. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
Texas.
21. EXECUTION. This instrument is executed and made on behalf of the Trust
by an officer of the Trust, not individually but solely as an officer, and the
obligations under this Agreement are not binding upon, nor shall resort be had
to the private property
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9
of, any of the Trustees, shareholders, officers, employees, or agents of the
Trust personally, but bind only the Trust property.
IN WITNESS WHEREOF, CONTINENTAL MORTGAGE AND EQUITY TRUST and CARMEL
REALTY, INC., by their duly authorized officers, have signed these presents all
as of the day and year first above written.
CONTINENTAL MORTGAGE AND EQUITY TRUST
By: /s/ Oscar W. Cashwell
-------------------------
Oscar W. Cashwell
President
CARMEL REALTY, INC.
By: /s/ Bruce A. Endendyk
-------------------------
Bruce A. Endendyk
President
127
EX-27
4
FINANCIAL DATA SCHEDULE
5
1,000
YEAR
DEC-31-1994
JAN-01-1994
DEC-31-1994
7,478
4,341
11,215
9,223
0
0
162,823
13,459
182,839
0
98,252
0
0
0
78,767
182,839
0
27,042
0
16,888
3,214
1,429
7,711
(2,541)
0
(2,541)
0
0
0
(833)
(.29)
(.29)