-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rQfx6r1YCQp3zloKfcyui6rzfpk0tKw/GvrccsFEQLWipQr4/fWbp+98YQ1u+AGV v5BfdLQYpZHWKqtho3Ucgg== 0000079259-95-000008.txt : 19950814 0000079259-95-000008.hdr.sgml : 19950814 ACCESSION NUMBER: 0000079259-95-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORTGAGE & REALTY TRUST CENTRAL INDEX KEY: 0000079259 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 231862664 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06613 FILM NUMBER: 95561212 BUSINESS ADDRESS: STREET 1: 8380 OLD YORK RD STE 300 CITY: ELKINS PARK STATE: PA ZIP: 19117 BUSINESS PHONE: 2158811525 FORMER COMPANY: FORMER CONFORMED NAME: PNB MORTGAGE & REALTY INVESTORS DATE OF NAME CHANGE: 19850102 10-Q 1 LIVE FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ Commission File Number 1-6613 MORTGAGE AND REALTY TRUST ------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 23-1862664 ------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) 8380 Old York Road, Suite 300 Elkins Park, Pennsylvania 19027-1590 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 881-1525 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----- ----- Number of Common Shares Outstanding at June 30, 1995: 11,226,215 MORTGAGE AND REALTY TRUST INDEX OF FINANCIAL INFORMATION PART I 1. Unaudited Financial Statements including the following: Balance Sheet at June 30, 1995 and September 30, 1994 Statement of Operations for the periods ended June 30, 1995 and 1994 Statement of Cash Flows for the nine months ended June 30, 1995 and 1994 Statement of Shareholders' Equity for the nine months ended June 30, 1995 Notes to the Financial Statements 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II 3. Defaults Upon Senior Securities 6. Exhibits and Reports on Form 8-K 1 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements: - -------------------------------------------------------------------------------- BALANCE SHEET - --------------------------------------------------------------------------------
June 30, September 30, 1995 1994 ------------ --------- ASSETS: Mortgage loans and investments: Standing loans $ 54,352,000 $ 61,851,000 Long-term amortizing loans 2,579,000 2,908,000 Participating loans and investments 1,961,000 4,563,000 Non-earning mortgage loans 25,000 - ------------ ------------ 58,917,000 69,322,000 ------------ ------------ Notes receivable 588,000 760,000 In-substance foreclosures: Earning 30,344,000 62,097,000 Non-earning 12,517,000 10,198,000 Real estate: Investment in real estate equities, net 56,871,000 56,857,000 Properties acquired through foreclosure and held for sale, net: Earning 72,491,000 68,437,000 Non-earning 34,742,000 32,282,000 Investment in partnerships, net 32,619,000 9,524,000 ------------ ------------ 287,857,000 309,477,000 Less allowance for losses (11,232,000) (13,430,000) ------------ ------------ 299,089,000 296,047,000 Cash and cash equivalents 50,388,000 60,332,000 Interest receivable and other assets 6,337,000 7,865,000 ------------ ------------ $344,582,000 $364,244,000 ============ ============ LIABILITIES: Senior secured notes $290,000,000 $290,000,000 Loan on equity investment 17,565,000 17,593,000 Accounts payable and accrued expenses 3,855,000 4,050,000 Interest payable 36,172,000 32,568,000 ------------ ------------ 347,592,000 344,211,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 3) SHAREHOLDERS' EQUITY: Preferred shares, $1 par value: 3,500,000 shares authorized, none issued - - Common shares, $1 par value: 20,000,000 shares authorized, 11,226,000 shares issued and outstanding 11,226,000 11,226,000 Additional paid-in capital 182,375,000 182,375,000 Accumulated deficit (196,611,000) (173,568,000) ------------ ------------ Total shareholders' equity (deficit) (3,010,000) 20,033,000 ------------ ------------ $344,582,000 $364,244,000 ============ ============
See accompanying notes. 2 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Periods Ended June 30, (Unaudited) - --------------------------------------------------------------------------------
Quarter Ended Nine Months Ended -------------------------- -------------------------- 6/30/95 6/30/94 6/30/95 6/30/94 ------------ ----------- ------------ ----------- Income: Interest and fee income on mortgage loans $ 2,200,000 $ 3,727,000 $ 7,381,000 $ 11,393,000 Income on rental properties: Rental income 6,327,000 4,910,000 17,844,000 13,379,000 Operating expense reimbursement 643,000 494,000 1,810,000 1,343,000 Interest on short-term investments 818,000 357,000 2,682,000 591,000 Other 50,000 28,000 97,000 76,000 ------------ ----------- ------------ ------------ 10,038,000 9,516,000 29,814,000 26,782,000 ------------ ----------- ------------ ------------ EXPENSES: Interest 10,378,000 8,361,000 30,210,000 23,823,000 Expenses of rental properties: Depreciation and amortization 1,914,000 1,533,000 5,400,000 4,366,000 Operating 2,941,000 2,665,000 8,413,000 7,399,000 Other operating expenses 1,068,000 1,111,000 3,266,000 3,739,000 Provision for losses on mortgage loans and related investments - - 3,000,000 - Reorganization expenses 1,063,000 591,000 2,568,000 2,008,000 ------------ ----------- ------------ ------------ 17,364,000 14,261,000 52,857,000 41,335,000 ------------ ----------- ------------ ------------ Net loss $ (7,326,000) $(4,745,000) $(23,043,000) $(14,553,000) ============ =========== ============ ============ PER SHARE: Net loss $(.65) $(.43) $(2.05) $(1.30) ===== ===== ====== ====== Weighted average number of common shares outstanding 11,226,000 11,226,000 11,226,000 11,226,000
See accompanying notes. 3 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS Nine Months Ended June 30, (Unaudited) - --------------------------------------------------------------------------------
1995 1994 ----------- ------------ Cash flows from operating activities: Net loss $(23,043,000) $(14,553,000) ------------ ------------ Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization on real estate 5,400,000 4,366,000 Decrease in payables and accrued expenses (195,000) (179,000) Increase in interest payable 3,604,000 23,479,000 Decrease (increase) in receivables and other assets 1,528,000 (1,224,000) Net change in interest reserves, deferred income (446,000) (632,000) Provision for losses 3,000,000 - Recoveries of charge offs to allowance for losses 317,000 1,019,000 Other - 11,000 ------------ ------------ Total adjustments 13,208,000 26,840,000 ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (9,835,000) 12,287,000 ------------ ------------ Cash flows from investing activities: Investments in real estate: Properties acquired through foreclosure (7,382,000) (3,662,000) In-substance foreclosures (854,000) (1,222,000) Real estate equities (1,942,000) (1,344,000) Partnerships (1,939,000) - Principal repayments on mortgage loans 957,000 24,428,000 Repayments on notes receivable 172,000 129,000 Sale of foreclosed property 3,350,000 6,464,000 Repayment on in-substance foreclosure 7,557,000 7,929,000 ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (81,000) 32,722,000 ------------ ------------ Cash flows from financing activities: Payment of senior secured notes (28,000) - ------------ ------------ Net cash used in financing activities (28,000) - ------------ ------------ Net increase (decrease) in cash and cash equivalents (9,944,000) 45,009,000 Cash and cash equivalents at beginning of period 60,332,000 11,451,000 ------------ ------------ Cash and cash equivalents at end of period $ 50,388,000 $ 56,460,000 ============ ============ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTMENT AND FINANCING ACTIVITIES: Charge offs against allowance for losses $ 5,515,000 $ 1,078,000 ============ ============ Transfer of in-substance foreclosures to real estate and investment in partnerships $ 29,991,000 $ 13,109,000 ============ ============ Transfer of in-substance foreclosures and real estate to mortgage loans $ 105,000 $ 750,000 ============ ============ Transfer of mortgage loans to real estate and in- substance foreclosures $ 9,762,000 $ 10,321,000 ============ ============
See accompanying notes. 4 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) - -------------------------------------------------------------------------------- STATEMENT OF SHAREHOLDERS' EQUITY For the Nine Months Ended June 30, 1995 (Unaudited) - --------------------------------------------------------------------------------
Additional Common Shares Paid-In Accumulated Shares Amount Capital Deficit Deficit ------------------------------------------------------------------- Balance, beginning of period 11,226,000 $11,226,000 $182,375,000 $(173,568,000) $20,033,000 Net loss (23,043,000) (23,043,000) ---------- ----------- ------------ ------------- ----------- Balance, end of period 11,226,000 $11,226,000 $182,375,000 $(196,611,000) $(3,010,000) ========== =========== ============ ============= ===========
See accompanying notes. 5 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION - On November 17, 1994, the Trust announced that it had reached an agreement in principle with a substantial number of holders of its Senior Notes on the terms of a restructuring of the Senior Notes. Pursuant to the agreement in principle, holders of the Senior Notes in the aggregate principal amount of $290 million plus accrued interest of $36.2 million through June 30, 1995 will receive under a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code, $110 million of new senior secured notes due 2002, a minimum of $50 million in cash and 97% of the restructured equity of the Trust (or substantially all the restructured equity if holders of the Trust's outstanding common shares do not vote to accept the prepackaged plan). If holders of the outstanding common shares vote to accept the prepackaged plan, such holders will retain 3% of the equity of the restructured Trust. The agreement in principle anticipates that the new senior secured notes will mature in 2002 and bear interest at the rate of 11-1/8% per annum. It is also anticipated that holders of unsecured claims will receive cash in the allowed amount of their claims. It is contemplated that the Trust will prepare a "shelf" registration statement for the new securities issued pursuant to the prepackaged plan. In April 1995, the Trust and certain holders of Senior Notes executed an agreement of understanding, pursuant to which such noteholders agreed to support the proposed restructuring. On April 11, 1995, pursuant to such agreement, the Trust advanced $25 million towards the $50 million minimum payment required to implement the proposed restructuring. The agreement to pursue the restructuring proposal is subject to a number of conditions and the Trust intends to effect the restructuring through a prepackaged chapter 11 bankruptcy. At this time there can be no assurance that the conditions to consummation of the proposed restructuring will be satisfied. On March 30, 1995, the Trust filed preliminary solicitation materials with the SEC regarding a proposed restructuring and prepackaged chapter 11 bankruptcy based on the terms of the November 17, 1994 agreement in principle. On June 7, 1995, the Trust filed definitive proxy materials with the SEC regarding the restructuring and the pre- packaged bankruptcy. On June 12, 1995, the Trust completed the mailing of the proxy materials to its creditors and shareholders. The solicitation of consents for the prepackaged plan from the Trust's creditors and shareholders will expire at 12:00 midnight, New York City time, on August 17, 1995, unless extended. Should the Trust not receive sufficient acceptances to seek confirmation of the pre- packaged plan by the bankruptcy court, the Trust would be forced to seek alternative means of restructuring. The Trust may be required to file a voluntary chapter 11 petition for which a new plan of reorganization would need to be negotiated. If a new plan of reorganization can not be confirmed within a reasonable amount of time, the Trust may be forced into a liquidation under Chapter 7 of the Bankruptcy Code. The financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable to a company on a "going concern" basis, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. These financial statements include adjustments and reclassifications that have been made to reflect 6 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (Continued) indebtedness as extended under the 1991 Plan and the Senior Note Indenture. These financial statements do not include any adjustments that would be required should the Trust be unable to continue as a going concern. The conditions noted above raise substantial doubt about the Trust's ability to continue as a going concern. These financial statements also do not include any adjustments that could be required as a result of the November 17, 1994 agreement in principle with certain holders of Senior Notes and related proposed restructuring and prepackaged chapter 11 bankruptcy, including adjustments required by The American Institute of Certified Public Accountants Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," for fresh start accounting. The Trust anticipates that any adjustments that would be occasioned in the restructuring process by its financial distress, by any inability of the Trust to continue as a going concern or by any inability of the Trust to achieve a consensual restructuring would be material and adverse. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended June 30, 1995 are not necessarily indicative of the results that may be expected for the year ended September 30, 1995. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES - The Trust is a real estate investment trust that has elected to be taxed under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Accordingly, no provision has been made for income taxes in the financial statements. For the fiscal year ended September 30, 1994 and the nine months ended June 30, 1995, there were significant differences between taxable net loss and net loss as reported in the financial statements. The differences were primarily temporary differences related to the recognition of bad debt deductions and accounting for reorganization costs. For financial accounting purposes, these items are expensed currently, while for tax purposes some portion of these items may be deferred to future periods. 7 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) The Trust incurred net operating losses of $35 million, $38 million, $31 million and $12 million for tax purposes in fiscal 1994, 1993, 1992 and 1991, respectively. Each of these net operating losses will be available for fifteen years as a loss carryforward to future years' taxable income. If during the course of the proposed restructuring, Cancellation of Indebtedness taxable income results, the net operating losses available for use in future years will be reduced by the amount of such Cancellation of Indebtedness income. The Trust intends to preserve its net operating losses, but the transfer of more than 50% of the ownership of the Trust to its creditors in a reorganization (as was provided in the November 1994 agreement in principle, and as is presently in the proposed restructuring currently being solicited, and as is likely in any alternate restructuring) will limit the future per annum use of its net operating losses (after the aforementioned reduction for Cancellation of Indebtedness income) under Internal Revenue Code Section 382. INTEREST INCOME - Interest income on each loan is recorded as earned. Interest income is not recognized if, in the opinion of the Trustees, collection is doubtful. The Trust generally considers loans as delinquent if payment of interest and/or principal, as required by the terms of the note, is more than 60 days past due. Accrual of interest income is generally terminated and foreclosure proceedings are started if payment is more than 60 days past due. RENTAL INCOME - Rental income is recognized on a straight-line basis over the applicable term of the lease. LOAN FEE INCOME - Loan fees are recorded as income using the "interest method". Accordingly, loan fees are deferred when received and are recorded as income over the term of the loan in relation to outstanding loan balances. ALLOWANCE FOR LOSSES - The allowance for losses on mortgage loans and related investments is determined in accordance with The American Institute of Certified Public Accountants Statement of Position on Accounting Practices of Real Estate Investment Trusts 75-2, as amended. This statement requires adjustment of the carrying value of mortgage loans to the lower of their carrying value or estimated net realizable value. Estimated net realizable value is the estimated selling price of a property offered for sale in the open market allowing a reasonable time to find a buyer, reduced by the estimated cost to complete and hold the property (including the estimated cost of capital), net of estimated cash income. At June 30, 1995, no assets were valued using the cost of capital method. Additional provisions for losses on mortgage loans and related investments may be necessary if the deterioration in real estate markets continues, or there is a significant increase in the Trust's cost of capital. See also Note 1, "Basis of Financial Statement Presentation and Plan of Reorganization". Further adjustments may also be necessary as a result of the restructuring negotiations. The Trust anticipates that any adjustments that would be occasioned in the restructuring process by its financial distress, by any inability 8 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) of the Trust to continue as a going concern or by any inability of the Trust to achieve a consensual restructuring would be material and adverse. CONCENTRATION OF CREDIT RISKS - The Trust's mortgage loan portfolio is heavily concentrated in California (49%) and Pennsylvania (23%). The mortgage loans are secured by the underlying real estate. The real estate is subject to risks arising in connection with the underlying real estate, such as defaults or non-renewal of the tenant leases, increased operating costs, environmental problems and availability of financing. PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE - Properties acquired through foreclosure and held for sale are recorded at the lower of cost or fair value at acquisition, which becomes the cost basis for accounting purposes. The fair value of the asset acquired, in accordance with Financial Accounting Standards Board Statement 15, is the amount that the Trust could reasonably expect to receive in a current sale between a willing buyer and a willing seller. Such properties are thereafter accounted for in the same manner as any similar asset acquired for investment as to depreciation and gain or loss upon sale. Subsequent to foreclosure, the properties are carried at the lower of cost or fair value less estimated costs to sell, as set forth in The American Institute of Certified Public Accountants' Statement of Position 92-3, "Accounting for Foreclosed Assets" ("SOP 92-3"). IN-SUBSTANCE FORECLOSURE - A loan is considered an in-substance fore- closure if: (1) the debtor has little or no equity considering the fair value of the collateral, (2) proceeds for repayment can be expected to come only from operation or sale of the collateral, and (3) the debtor has either formally or effectively abandoned control of the collateral. Loans meeting the criteria for in-substance foreclosure are reclassified and recorded at the lower of cost or fair value of the collateral, which establishes a new cost basis in the same manner as a legal foreclosure. Properties acquired through foreclosure and held for sale and in- substance foreclosures are reclassified from non-earning to earning status if they produce and maintain for a minimum of two consecutive quarters an annualized return of 5% or greater cash flow yield. NET LOSS PER SHARE - Net loss per share is computed using the weighted average common shares outstanding during each period. Fully diluted net loss per share is not disclosed because such information is not meaningful. DEPRECIATION AND AMORTIZATION - Depreciation and amortization are computed on the straight-line method over an estimated useful life of 40 years for buildings and three to five years for other property and lease commissions. Investments in real estate equities and properties acquired through foreclosure and held for sale and investments in partnerships are shown on the balance sheet, net of accumulated depreciation. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include short- term investments (high grade commercial paper carried at cost of $48.7 million at June 30, 1995) with original maturities ranging from 24 to 26 days. 9 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) Included in cash and cash equivalents is $1.4 million of restricted cash which represents the funding of the employee retention plan (see Note 8) and $1.4 million related to borrowers' deposits. NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE The following table summarizes the Trust's mortgage loan portfolio:
June 30, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Underlying Security Investments Amount Investments Amount - --------------------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) Apartments 1 $ 226 1 $ 254 Residential/Condominium* 8 1,187 9 1,334 Office Buildings 3 18,124 2 1,699 Industrial Buildings 8 11,190 7 30,328 Research & Development 1 12,128 3 16,371 Retail Buildings 3 13,002 4 16,276 Hotel/Motels 1 3,060 1 3,060 -- ------- -- ------- Total 25 $58,917 27 $69,322 == ======= == ======= _____________ * Includes 80 mortgage end loans on 8 investments at June 30, 1995 and 80 mortgage end loans on 9 investments at September 30, 1994.
The Trust's mortgage loan portfolio consists of loans located principally in California, 49% and Pennsylvania, 23%. At June 30, 1995, the Trust had undisbursed commitments of $605,000, all of which represents additional advances on partially funded mortgage loans. As of June 30, 1995, there was one earning loan totalling $16,608,000 that was delinquent (more than 60 days past due) as to principal. At June 30, 1995 and 1994, loans totalling $27,389,000 and $33,693,000, respectively, were extended beyond their original contractual maturity dates. Loan terms are extended in the normal course of business for various reasons, such as delays in construction, slower leasing than originally anticipated or delay in obtaining permanent financing. 10 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (Continued) At June 30, 1995 and 1994, earning mortgage loans totalling $27,389,000 and $18,313,000, respectively, had been subject to contractual interest rate modifications due to financial difficulties of the borrower. Interest income of $615,000 and $402,000 for the quarters ended June 30, 1995 and 1994, respectively, was earned on these loans. Additional interest of $129,000 and $21,000 for the quarter ended June 30, 1995 and 1994, respectively, would have been earned if rates had not been modified. The following table summarizes the Trust's investment in in-substance foreclosures:
June 30, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Property Investments Amount Investments Amount - ---------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) EARNING: Office Buildings 1 $ 4,654 2 $12,840 Retail Buildings 2 13,798 3 28,452 Apartments - - 1 6,695 Research & Development Bldgs. - - 2 14,110 Industrial Buildings 2 11,892 - - -- ------- -- ------- Total Earning 5 30,344 8 62,097 -- ------- -- ------- NON-EARNING: Industrial Buildings 3 12,517 2 10,198 -- ------- -- ------- Total Non-Earning 3 12,517 2 10,198 -- ------- -- ------- Total 8 $42,861 10 $72,295 == ======= == =======
The following table summarizes the Trust's investment in real estate equities, net of accumulated depreciation of $11,956,000 at June 30, 1995 and $10,023,000 at September 30, 1994:
June 30, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Property Investments Amount Investments Amount - ---------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) Office Buildings 5 $26,539 4 $26,264 Industrial Buildings 1 6,419 1 6,510 Retail Buildings 1 23,913 1 24,083 -- ------- -- ------- Total 7 $56,871 6 $56,857 == ======= == =======
11 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (Continued) The following table summarizes the Trust's investment in properties acquired through foreclosure and held for sale, net of accumulated depreciation of $11,198,000 at June 30, 1995 and $8,329,000 at September 30, 1994:
June 30, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Property Investments Amount Investments Amount - ---------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) EARNING Apartments 3 $ 20,873 3 $ 21,012 Office Buildings 3 14,702 4 13,942 Industrial Buildings 6 23,063 5 19,913 Retail Buildings 1 7,886 1 7,585 Research & Development Bldgs. 2 5,967 2 5,985 -- -------- -- -------- Total Earning 15 72,491 15 68,437 -- -------- -- -------- NON-EARNING Office Buildings 4 12,821 5 16,449 Industrial Buildings 5 14,203 4 10,794 Retail Buildings 1 7,718 2 5,039 -- -------- -- -------- Total Non-Earning 10 34,742 11 32,282 -- -------- -- -------- Total 25 $107,233 26 $100,719 == ======== == ========
The following table summarized the Trust's investment in partnerships, net of accumulated depreciation of $852,000 at June 30, 1995 and $314,000 at September 30, 1994:
June 30, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Property Investments Amount Investments Amount - ---------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) Industrial Buildings 3 $15,592 2 $ 9,524 Retail Buildings 2 17,027 - - -- ------- -- ------- Total 5 $32,619 2 $ 9,524 == ======= == =======
12 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 4. ALLOWANCE FOR LOSSES The changes in the allowance for losses for the nine months ended June 30, 1995 and 1994 were as follows:
6/30/95 6/30/94 -------- -------- (Amounts in Thousands) Balance at beginning of period $13,430 $11,808 Provisions charged to expense 3,000 - ------- ------- 16,430 11,808 Less charges against allowance, net of recoveries 5,198 245 ------- ------- Balance at end of period $11,232 $11,563 ======= =======
Approximately $8,129,000 and $6,149,000 of the allowance at June 30, 1995 and 1994, respectively, are applicable to properties acquired through foreclosure and held for sale. NOTE 5. SENIOR NOTES SENIOR SECURED NOTES - The lack of liquidity in many of the commercial real estate markets continued during the past year. Although the Trust was able to meet the required principal payment at December 31, 1992, reducing the principal balance of the Senior Notes to $290 million, it did not have sufficient funds to meet the $20 million required principal payment due June 30, 1993 or the $33.8 million required principal payment due December 31, 1993 or the $30 million required principal payment due June 30, 1994 or the $18.8 million required principal payment due December 31, 1994 or the $30 million required principal payment due June 30, 1995 (taking into account permitted deferrals). The Trust also did not make the $6.6 million, the $6.4 million, the $7.2 million, the $8.7 million, the $9.1 million, the $9.6 million and the $9.8 million interest payments due December 31, 1993, March 31, 1994, June 30, 1994, September 30, 1994, December 31, 1994, March 31, 1995, and June 30, 1995, respectively. The average borrowing rates for the nine months ended June 30, 1995 and 1994, respectively, were 13.19% and 10.34%. At June 30, 1995, the outstanding 13.62% interest rate on the Senior Notes was composed of interest at 13.00% on $200 million of Senior Notes (including default interest at 1%) and 15.00% on $90 million of deferred amounts of Senior Notes (including default interest at 1%). LOAN ON EQUITY INVESTMENT - In November 1991, the Trust acquired full ownership of a retail center in which it had a partnership interest. The Trust had a fully funded construction borrowing commitment with a balance outstanding of $17.6 million at June 30, 1995. The contractual interest rate on this loan is 11% (Prime + 2%, floor of 8.5%), and the loan matures on September 5, 1995. The Trust can further extend the loan to April 22, 1996, but will be required to make a $3.6 million payment in order to receive the additional extension. 13 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Financial Accounting Standards Board Statement No. 107 Disclosure of Fair Value of Financial Statements ("SFAS" 107) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Trust. The carrying value of cash and cash equivalents approximates that fair value because of the liquidity and short-term maturities of these instruments. The fair value of mortgage loans is estimated by discounting cash flows at what is considered a market interest rate for loans with similar terms to borrowers of similar credit quality. The measurement of the fair value of the Senior Notes at June 30, 1995 is not practical in the context of the proposed restructuring. The loan on equity investment is a variable rate loan that reprices frequently, thus fair value is based on the carrying amount of the loan. The estimated fair values of the Trust's financial instruments at June 30, 1995 are as follows:
Carrying Fair Amount Value -------- -------- (Amounts in Thousands) FINANCIAL ASSETS: Cash and cash equivalents $50,388 $50,388 Mortgage loans and notes receivable (net of allowance for possible losses) 58,898 58,898 FINANCIAL LIABILITIES: Loan on equity investment (17,565) (17,565) Off-Balance Sheet Financial Instruments: Unfunded loan commitments - (605)
14 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 7. SHARE OPTION PLAN On August 14, 1994, the 1984 Share Option Plan terminated. As of June 30, 1995, options to purchase 348,500 Common Shares were outstanding under the 1984 Share Option Plan. The exercise price per share varies from $2.50 to $4.15. Options granted, other than those granted in fiscal 1991, expire five years from the date of grant and may be exercised at any time six months after the date of grant, subject to the limitation that the aggregate fair market value (determined as of the time the Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any participant during any calendar year shall not exceed $100,000. Options granted during fiscal 1991, pursuant to the Employee Retention Plan described in Note 8, expire five years from the date of grant but do not vest until three years from the date of grant. Options to purchase 77,500 Common Shares at a price of $14.50 terminated during the nine months ended June 30, 1995. In addition to cash, Options may be exercised by exchanging the Trust's Common Shares valued at the market price on the date of exercise of the Options. During the nine months ended June 30, 1995, no Options were exercised. NOTE 8. EMPLOYEE RETENTION PLAN The Trust established an Employee Retention Plan, to be administered by the Compensation and Nominating Committee (the "Committee"), in order to assure the continuity and performance of employees of the Trust. The Plan contains four categories of benefits: an incentive program, stock options, termination pay and a retention bonus. The Committee established an incentive program for calendar year 1991. The incentive pool was calculated based on the reduction of the Trust's outstanding debt (the Senior Notes). During the nine month periods ended June 30, 1995 and 1994, the Committee approved the payment of discretionary bonuses totalling $128,500 and $123,000, respectively, for certain officers and employees of the Trust. On March 29, 1991, the Committee awarded stock options for the purchase of 197,500 Common Shares at an option price of $4.15. The options had a three-year vesting period from the date of grant and vested on March 29, 1994. A termination pay plan has been established to cover termination of employment without cause during the period that the Senior Notes, as defined, are outstanding. Employees will be entitled to compensation ranging from a minimum of twelve weeks to a maximum of eighteen months pay. In addition, certain health benefits will continue to be paid by the Trust over a period of time equal to the period used in calculating severance pay. The Trust estimates that the maximum cost of the termination pay plan would be approximately $1.4 million and the cost is charged to expense at date of termination (as defined in the termination pay plan). The retention bonus, which totalled $350,000, was paid on February 28, 1992 to certain employees who remained with the Trust one year after the Effective Date of the 1991 Plan (February 27, 1991). 15 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 9. ISSUANCE OF SHARES Effective April 1, 1992, the Trust terminated its Dividend Reinvestment and Share Purchase Plan. The Trust is authorized to issue up to 3,500,000 Preferred Shares on terms to be established by the Trustees. No preferred shares have been issued to date. The Trust contributed 150,000 Common Shares (1.4% of outstanding shares) as part of the settlement of the consolidated class actions and the Class 5 claims remaining in the chapter 11 proceeding. The settlement and contribution of shares occurred on September 17, 1993. 16 MORTGAGE AND REALTY TRUST FORM 10Q Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - A Plan of Reorganization under Chapter 11 of the Bankruptcy Code was confirmed at a hearing held in the Bankruptcy Court in Los Angeles, California, on February 21, 1991, and an order was entered February 27, 1991, confirming the Plan. As a result of the liquidity problems in the commercial real estate markets, the Trust was not able to meet the required amortization at June 30, 1992 and the debt was restructured in July 1992 with the unanimous consent of the creditors. The debt is now governed by an indenture dated as of July 15, 1992. At December 31, 1992, debt outstanding was reduced to $290 million, the maximum debt level permitted under the Plan on that date. For the nine months ended June 30, 1995, cash used in operating activities decreased the cash balance by approximately $9.8 million. This was due primarily to a decrease in interest payable due to the advances made on April 11, 1995 towards the minimum payment required to implement the proposed restructuring. Cash used in investing activities decreased the cash balance by $81,000. This was due to higher advances, net of repayments, on properties acquired through foreclosure and held for sale, real estate equities and investments in partnerships. Due to the lack of liquidity that has existed in the real estate marketplace, the Trust has not been able to meet payment and other obligations on its outstanding debt. Under the financial covenants of the Indenture governing the Senior Notes, the Trust was required to maintain a ratio of outstanding securities to its capital base (as defined in the Indenture) of 515% at March 31, 1993. In addition, under the Indenture the Trust was required to maintain a ratio of outstanding securities to its capital base of 438% at June 30, 1993 and September 30, 1993, 358% at December 31, 1993 and March 31, 1994, and 313% at June 30, 1994 and September 30, 1994, 209% at December 31, 1994 and March 31, 1995 and 120% at June 30, 1995, and a ratio of earning assets (as defined in the Indenture) to outstanding securities of 113% at June 30, 1993 and September 30, 1993, 116% at December 31, 1993 and March 31, 1994, 117% at June 30, 1994 and September 30, 1994, 120% at December 31, 1994 and March 31, 1995 and 131% at June 30, 1995. The Trust failed to meet each of these ratios, constituting events of default under the Indenture. However, on May 26, 1993, the Trust received from the holders of more than 66-2/3% in principal amount of Senior Notes a waiver relating to the March 31 default. Outstanding Securities refers to all $290 million of securities governed by and registered under the Indenture dated July 15, 1992 for the Senior Secured Uncertificated Notes due 1995. Capital Base means the amount equal to the Company's Shareholders' Equity less 50% of the non-earning assets. Non-Earning Assets means the aggregate of non-earning loans (as defined in the Indenture) and non-earning properties (properties that have not produced or maintained an annualized return of 5% or greater cash flow yield for two consecutive quarters). Earning Assets means an amount equal to between the aggregate amount of invested assets and aggregate amount of non-earning assets. Management has held discussions with the representatives of the creditors to explore various alternatives for restructuring the outstanding debt obligations. The Trust's present intention is to effect a consensual restructuring through a prepackaged chapter 11 bankruptcy based on the November 17, 1994 agreement in principle. In April 1995, the Trust and certain holders of Senior Notes executed an agreement of understanding, pursuant to which such noteholders agreed to support the proposed restructuring On April 11, 1995, pursuant to such agreement, the Trust advanced $25 million towards the $50 million minimum payment required to implement the proposed restructuring. See Note 1, "Basis of Financial Information and Plan of 17 MORTGAGE AND REALTY TRUST FORM 10Q Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Reorganization". On March 30, 1995, the Trust filed preliminary solicitation materials with the SEC regarding a proposed restructuring and prepackaged chapter 11 bankruptcy based on the terms of the November 17, 1994 agreement in principle. On June 7, 1995, the Trust filed definitive proxy materials with the SEC regarding the restructuring and the prepackaged bankruptcy. On June 12, 1995, the Trust completed the mailing of the proxy materials to its creditors and shareholders. The solicitation of consents for the prepackaged plan from the Trust's creditors and shareholders will expire at 12:00 midnight, New York City time, on August 17, 1995, unless extended. Should the Trust not receive sufficient acceptances to seek confirmation of the prepackaged plan by the bankruptcy court, the Trust would be forced to seek alternative means of restructuring. The Trust may be required to file a voluntary chapter 11 petition for which a new plan of reorganization would need to be negotiated. If a new plan of reorganization can not be confirmed within a reasonable amount of time, the Trust may be forced into a liquidation under Chapter 7 of the Bankruptcy Code. Additionally, although the holders of more than 66-2/3% of the Trust's debt securities had agreed with the Trust to temporarily forebear further creditor action on the defaults for a defined standstill period, such standstill period expired on December 3, 1993. The Company believes that no further extension of the standstill will be granted. The Trust intends, therefore, to continue to operate its business and seek Senior Note holder consent on an ad hoc basis as such consent is required. Although the Trust believes that such consents, if requested, would be in the best interest of the Trust, its shareholders and the Senior Note holders, there can be no assurance that the Trust will obtain sufficient consents as they are required. Currently, the Trust is in default under the Indenture and has continued to suspend payments on the Senior Notes. Consequently, there can be no assurance that the Indenture Trustee and the Collateral Agents will not take remedial or enforcement action, including acceleration of the Senior Notes and foreclosure. If it becomes impossible for the Trust to continue operations under such circumstances, it may be necessary for Mortgage and Realty Trust to explore other alternatives, including seeking relief under chapter 11 or chapter 7 of the Bankruptcy Code. At June 30, 1995, the Trust had cash and cash equivalents of $50.4 million. Included in cash and cash equivalents are $1.4 million of restricted cash which represents the funding of the employee retention plan and $1.4 million related to borrowers' deposits. The Trust's unfunded loan commitments totalled $605,000 at June 30, 1995. RESULTS OF OPERATIONS-NINE MONTHS ENDED JUNE 30, 1995 VS. NINE MONTHS ENDED JUNE 30, 1994 - Net loss for the nine months ended June 30, 1995 was $(23,043,000) or $(2.05) per share compared to a net loss of $(14,553,000) or $(1.30) per share for the nine months ended June 30, 1994. The nine months ended June 30, 1995 included a provision for losses of $3,000,000 or $.27 per share compared to no provision for the nine months ended June 30, 1994. The Trust's spread (interest income on mortgage loans plus net operating income from real estate owned less interest expense) decreased from $(5,107,000) for the nine months ended June 30, 1994 to $(11,588,000) for the nine months ended June 30, 1995. Offsetting these decreases was an increase in interest income on short-term investments which was $2,682,000 for the nine months ended June 30, 1995 compared to $591,000 for the nine months ended June 30, 1994. Interest and fee income on mortgage loans decreased $4,012,000 to $7,381,000 for the nine months ended June 30, 1995 from $11,393,000 for the nine months ended June 30, 1994. The decrease was due primarily to a reduction in earning mortgage loans (including earning in-substance foreclosures) which totalled $89.2 million at June 30, 1995 compared to $137.5 million at June 30, 1994. During the nine months ended June 30, 1995, there were three mortgage loans totalling $21.7 million that were transferred into investment in Partnerships. In addition, advances of $1.9 million on investment in partnerships were made during the period. 18 MORTGAGE AND REALTY TRUST FORM 10Q Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) During the nine months ended June 30, 1995, no advances were made on mortgage loans. Prepayments on mortgage loans of approximately $15.8 million were received during the nine months ended June 30, 1994. There were no prepayments on mortgage loans received during the nine months ended June 30, 1995. The average interest rate on mortgage loans for the nine months ended June 30, 1995 was 7.84% compared to 8.14% for the nine months ended June 30, 1994. Rental income increased $4,465,000 to $17,844,000 in the nine months ended June 30, 1995 from $13,379,000 for the nine months ended June 30, 1994. In addition to rental income, the Trust received reimbursement of certain operating expenses totalling $1,810,000 and $1,343,000 for the nine months ended June 30, 1995 and 1994, respectively. Operating expenses and depreciation and amortization on rental properties increased $2,048,000 to $13,813,000 for the nine months ended June 30, 1995 from $11,765,000 for the nine months ended June 30, 1994, primarily from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments increased due to the continuing accumulation of available cash. Available cash increased due to no payment of principal and interest on the Secured Notes since September 30, 1993 through March 31, 1995 Interest expense increased $6,387,000 to $30,210,000 in the current period from $23,823,000 for the nine months ended June 30 1994. This was due primarily to an increase in the average borrowing rate from 10.34% for the nine months ended June 30, 1994 to 13.19% for the nine months ended June 30, 1995. Other operating expenses decreased $473,000 to $3,266,000 for the nine months ended June 30, 1995 from $3,739,000 for the nine months ended June 30, 1994. The decrease was due to decreases in professional fees and expenses, insurance costs, Trustees expenses and tax (other than income). Reorganization expenses related to the Chapter 11 filing and debt restructuring expenses were $2,568,000 for the nine months ended June 30, 1995 compared to $2,008,000 for the nine months ended June 30, 1994. These expenses reflect professional fees incurred by the representatives of the creditors, shareholders and the Trust. RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1995 VS. QUARTER ENDED MARCH 31, 1995 - Net loss for the quarter ended June 30, 1995 was $(7,326,000) or $(.65) per share compared $(10,263,000) or $(.91) per share for the quarter ended March 31, 1995. The quarter ended March 31, 1995 included a provision for losses of $3,000,000 or $.27 per share compared to no provision for the quarter ended June 30, 1995. Interest and fee income on mortgage loans decreased $103,000 to $2,200,000 for the quarter ended June 30, 1995 from $2,303,000 for the quarter ended March 31, 1995. The decrease was due to income lost in the current period from transfers that occurred during the quarter ended March 31, 1995. Rental income increased $502,000 to $6,327,000 in the quarter ended June 30, 1995 from $5,825,000 for the quarter ended March 31, 1995. In addition to rental income, the Trust received reimbursement of certain operating expenses totalling $643,000 and $590,000 for the quarters ended June 30, 1995 and March 31, 1995, respectively. Operating expenses and depreciation and amortization on rental properties increased $271,000 to $4,855,000 for the quarter ended June 30, 1995 from $4,584,000 for the quarter ended March 31, 1995, primarily from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments decreased due to the $25 million advance towards the minimum payment required to implement the proposed restructuring made on April 11, 1995. 19 MORTGAGE AND REALTY TRUST FORM 10Q Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest expense increased $105,000 to $10,378,000 in the current quarter from $10,273,000 for the quarter ended March 31, 1995. This was due primarily to an increase in the average borrowing rate from 13.45% for the quarter ended March 31, 1995 to 13.62% for the quarter ended June 30, 1995. Reorganization expenses related to the Chapter 11 filing and debt restructuring expenses were $1,063,000 for the quarter ended June 30, 1995 compared to $1,135,000 for the quarter ended March 31, 1995. These expenses reflect professional fees incurred by the representatives of the creditors, shareholders and the Trust. RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1995 VS. QUARTER ENDED JUNE 30, 1994 - Net loss for the quarter ended June 30, 1995 was $(7,326,000) or $(.65) per share compared to $(4,745,000) or $(.43) per share for the quarter ended June 30, 1994. Interest and fee income on mortgage loans decreased $1,527,000 to $2,200,000 for the quarter ended June 30, 1995 compared to $3,727,000 for the quarter ended June 30, 1994. The decrease was due primarily to a reduction in earning mortgage loans (including earning in-substance foreclosures) which totalled $137.5 million at June 30, 1994 compared to $89.2 million at June 30, 1995. Rental income increased $1,417,000 to $6,327,000 in the quarter June 30, 1995 from $4,910,000 for the quarter ended June 30, 1994. In addition to rental income, the Trust received reimbursement of certain operating expenses totalling $643,000 and $494,000 for the quarters ended June 30, 1995 and 1994, respectively. Operating expenses and depreciation and amortization on rental properties increased $657,000 to $4,855,000 for the quarter ended June 30, 1995 from $4,198,000 for the quarter ended June 30, 1994, primarily from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments increased due to the continuing accumulation of available cash. Interest expense increased $2,017,000 to $10,378,000 for the current quarter compared to $8,361,000 for the quarter ended June 30, 1994. This increase was due primarily to an increase in the average borrowing rate from 11.02% for the quarter ended June 30, 1994 to 13.62% for the quarter ended June 30, 1995. Reorganization expenses related to the Chapter 11 filing and debt restructuring expenses were $1,063,000 for the quarter ended June 30, 1995 compared to $591,000 for the quarter ended June 30, 1994. These expenses reflect professional fees incurred by the representatives of the creditors, shareholders and the Trust. NON-EARNING LOANS AND INVESTMENTS - At June 30, 1995, the Trust's non-earning loans, non-earning in-substance foreclosures and non-earning properties acquired through foreclosure and held for sale were $47,284,000, representing 15.81% of invested assets compared to $52,460,000 (17.58%) at March 31, 1995 and $40,539,000 (13.08%) at June 30, 1994. 20 MORTGAGE AND REALTY TRUST FORM 10Q PART II Item 3. DEFAULTS UPON SENIOR SECURITIES The Trust did not make a $30 million required principal payment due June 30, 1995 on the Senior Notes. Also, the payment of $9.8 million in interest due June 30, 1995 on the Senior Notes was not made. In addition, based on financial results at March 31, 1995 the Trust was in violation of certain financial covenants in the Indenture relating to the ratio of outstanding securities to the Trust's capital base and the ratio of earning assets to outstanding securities. Outstanding Securities refers to all Securities governed by and registered under the Indenture dated July 15, 1992 for the Senior Secured Uncertificated Notes due 1995. Capital Base means the amount equal to the Company's Shareholders' Equity less 50% of the non-earning assets. Non-Earning Assets means the aggregate of non-earning loans (as defined in the Indenture) and non-earning properties (properties that do not produce and maintain an annualized return of 5% or greater cash flow yield). Earning Assets means an amount equal to between the aggregate amount of invested assets and aggregate amount of non-earning assets. Under the financial covenants of the Indenture, the Trust was required to maintain a ratio of outstanding indenture securities to its capital base (as defined in the Indenture) of 102% at June 30, 1995 and a ratio of earning assets to outstanding securities of 131% at June 30, 1995. Failure to satisfy these covenants constitute additional events of default under the Indenture. In addition, at December 31, 1994, the Trust's non-performing assets (as defined in the Indenture) exceeded the limits prescribed in the Indenture. In addition to constituting an event of default, the Trust is obligated under the Indenture to pay to the holders of Senior Notes a penalty equal to 1.5% of the excess of non-performing assets, or a payment of approximately $183,000. The are also outstanding certain other events of default under the Indenture. Notwithstanding the uncured events of default, neither the Indenture Trustee nor any holders of the Senior Notes have accelerated the Senior Notes. On July 2, 1993 holders of approximately 81% of the Senior Notes agreed, subject to certain conditions, not to accelerate the Senior Notes or take any other remedial or enforcement action during a defined standstill period (the "Standstill Period") initially expiring July 31, 1993. The Standstill Period was extended by holders of more than 66-2/3% of the Senior Notes on August 3, August 20, September 23, October 5 and November 23, 1993. However, the Standstill Period expired on December 3, 1993. At the present time, it appears unlikely that any further extensions of the Standstill Period will be granted. Subsequent to the expiration of the Standstill Period, on or about December 8, 1993 the Indenture Trustee (and the Collateral Agents) notified the Trust's bank of the Indenture Trustee's security interest in the Trust's deposit accounts and instructed the bank to freeze the Trust's cash until otherwise instructed by the Indenture Trustee. Since that date, the Trust has operated on an ad hoc basis with the Indenture Trustee in administering its cash, with all cash use subject to review and approval by the Indenture Trustee. On or about February 3, 1994, the Trust and the Indenture Trustee and Collateral Agents reached further understanding regarding the Trust's use of cash and administration of its assets in the absence of a continued or extended Standstill 21 MORTGAGE AND REALTY TRUST FORM 10Q PART II Item 3. DEFAULTS UPON SENIOR SECURITIES (Continued) Period. Pursuant to the understanding, which is terminable at will by the Indenture Trustee or Collateral Agents, the Trust will continue to use its cash on an ad hoc basis, subject to Indenture Trustee or Collateral Agent approval, and the Trust will administer its assets as if no default had occurred and was continuing. There can be no assurance that the Indenture Trustee will not terminate the understanding or take further remedial or enforcement action with respect to the Trust's bank accounts or other properties, including acceleration of the Senior Notes and foreclosure. Such action, or failure of the Indenture Trustee and the Collateral Agents to consent to necessary use of cash or releases of collateral in the conduct of the Trust's business, would have a material adverse effect on the Trust's operations and could cause the Trust to seek relief under Chapter 11 or Chapter 7 of the United States Bankruptcy Code. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS Exhibits are as set forth in the "INDEX TO EXHIBITS" on page 24. (B) REPORTS ON FORM 8-K None 22 MORTGAGE AND REALTY TRUST FORM 10Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MORTGAGE AND REALTY TRUST By /s/ Victor H. Schlesinger ------------------------------- Victor H. Schlesinger Chairman By /s/ Daniel F. Hennessey ------------------------------- Daniel F. Hennessey Treasurer Principal Financial Officer DATE: August 11, 1995 23 MORTGAGE AND REALTY TRUST FORM 10Q INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ------- ----------- 11* Schedule of Net Income (Loss) Per Share - Assuming Full Dilution - ------------------ * Exhibit filed with this Form 10-Q. 24 EX-11 2 EXHIBIT 11 Exhibit 11 MORTGAGE AND REALTY TRUST SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION FOR THE PERIODS ENDED JUNE 30, 1995
Quarter Nine Months Ended Ended ------------ ------------- BASIS: Net (loss) $(7,326,000) $(23,043,000) Average common shares outstanding 11,226,000 11,226,000 20% limitation on assumed repurchase 2,245,000 2,245,000 Market price at the end of the period $.25 $.25 Options outstanding 348,500 348,500 COMPUTATION: Proceeds: Options 348,500 348,500 Average exercise price X $3.35 X $3.35 ----------- ----------- $ 1,167,000 $ 1,167,000 =========== =========== Adjustment of proceeds: Purchase of outstanding common shares at market value $ 561,000 $ 561,000 Retirement of debt 606,000 606,000 ----------- ----------- $ 1,167,000 $ 1,167,000 =========== =========== Adjustment of net income (loss): Net (loss) before gain on sales of real estate $(7,326,000) $(23,043,000) Interest reduction 20,000 60,000 ----------- ------------ Adjusted net income (loss) $(7,306,000) $(22,983,000) =========== ============ Adjustment of shares outstanding: Average shares outstanding 11,226,000 11,226,000 Net shares repurchased (1,897,000) (1,897,000) ----------- ----------- Adjusted shares outstanding (basis for computation of net income per share - assuming full dilution) 9,329,000 9,329,000 =========== =========== Fully diluted earnings per share: Net (loss) $(.78) $(2.46) ===== ======
NOTE - Primary earnings per share is based on the average number of shares outstanding during the period. Exhibit 11 MORTGAGE AND REALTY TRUST SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION FOR THE PERIODS ENDED JUNE 30, 1994
Quarter Nine Months Ended Ended ------------ ------------ BASIS: Net (loss) $(4,745,000) $(14,553,000) Average common shares outstanding 11,226,000 11,226,000 20% limitation on assumed repurchase 2,245,000 2,245,000 Market price at the end of the period $.375 $.375 Options outstanding 426,000 426,000 COMPUTATION: Proceeds: Options 426,000 426,000 Average exercise price X $5.37 X $5.37 ----------- ------------ $ 2,288,000 $ 2,288,000 =========== ============ Adjustment of proceeds: Purchase of outstanding common shares at market value $ 842,000 $ 842,000 Retirement of debt 1,446,000 1,446,000 ----------- ------------ $ 2,288,000 $ 2,288,000 =========== ============ Adjustment of net income (loss): Net (loss) before gain on sales of real estate $(4,745,000) $(14,553,000) Interest reduction 37,000 112,000 ----------- ------------ Adjusted net income (loss) $(4,708,000) $(14,441,000) =========== ============ Adjustment of shares outstanding: Average shares outstanding 11,226,000 11,226,000 Net shares repurchased (1,819,000) (1,819,000) ----------- ------------ Adjusted shares outstanding (basis for computation of net income per share - assuming full dilution) 9,407,000 9,407,000 =========== ============ Fully diluted earnings per share: Net (loss) $(.50) $(1.54) ===== ======
NOTE - Primary earnings per share is based on the average number of shares outstanding during the period. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS SEP-30-1995 OCT-01-1994 JUN-30-1995 50,388 0 6,337 (11,232) 0 0 0 0 344,582 0 307,565 11,226 0 0 (14,236) 344,582 0 29,814 0 17,079 2,568 3,000 30,210 (23,043) 0 (23,043) 0 0 0 (23,043) (2.05) (2.05) -----END PRIVACY-ENHANCED MESSAGE-----