CONTINENTAL MORTGAGE & EQUITY TRUST, 10-K/A, 1995-10-23

CONTINENTAL MORTGAGE & EQUITY TRUST
10-K/A, 1995-10-23
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A

[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
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

California 94-2738844
- ------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- -------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)

(214) 692-4700
----------------------------------------------------
(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 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 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

1
<PAGE> 2
This Form 10-K/A amends the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1994 as follows:

ITEM 1. BUSINESS - page 5

ITEM 2. PROPERTIES - page 8

ITEM 3. LITIGATION - page 24

ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS - pages 25 and 26

ITEM 6. SELECTED FINANCIAL DATA - page 27

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - pages 28 and 30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - pages 38, 47, 53, 61,
62, 65, 67 and 68

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
page 85

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K -
page 91

Exhibits to Annual Report on Form 10-K - page 93
<PAGE> 3
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. See ITEM 10.
"TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - Litigation and
Claims Involving Mr. Phillips." 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

5
<PAGE> 4
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. The Trust holds a fee
simple title to all of the properties in its real estate portfolio. 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.]

8
<PAGE> 5
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.

For purposes of the Modification requirements, the term "related party
transaction" means and includes (i) any transaction between or among the Trust
or IORT, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any
transaction between or among the Trust, its affiliates or subsidiaries and the
Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any
transaction between or among the Trust or any of its affiliates or subsidiaries
and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of
their affiliates has an ongoing or contemplated business or financial
transaction or relationship of any kind, whether direct or indirect, or has had
such a transactiion or relationship in the preceding one year.

The Modification requirements for related party transactions do not apply to
direct contractual agreements for services between the Trust and the Advisor
or one of its affiliates (i.e. the Advisory Agreement, Property Management
Contracts, etc.). These agreements require the prior approval by two-thirds of
the Trustees of the Trust, and if required, approval by a majority of the
shareholders. The Modification requirements for related party transactions also
do not apply to joint ventures between or among the Trust and IORT, NIRT or TCI
or any of their affiliates or subsidiaries and a third party having no prior or
intended future business or financial relationship with Mr. Phillips, Mr.
Friedman, the Advisor, or any affiliate of such parties. Such joint ventures
may be entered into on the affirmative vote of a majority of the Trustees of
the Trust.

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:

<TABLE>
<CAPTION>
Shares Voting
-----------------------------------
Withheld
Trustee For Authority
------- --------- -----------
<S> <C> <C>
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
</TABLE>

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
<PAGE> 6
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.

<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------ -------- -------
<S> <C> <C>
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
</TABLE>

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:

<TABLE>
<CAPTION>
Date Declared Record Date Payable Date Amount
- ---------------- ----------------- ----------------- ------
<S> <C> <C> <C>
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
</TABLE>

The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1994 and 1993 represented a return of capital.

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
<PAGE> 7
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.

In August 1994, Mr. Phillips and his affiliates, primarily ART and BCM, owned
approximately 39.9% of the Trust's outstanding shares of beneficial interest.
This shareholder group desired to purchase additional shares of the Trust and
requested that the Trust's Board of Trustees consider the elimination of the
limitations on the poercentage of shares which may be acquired by the
shareholder group. The Board of Trustees reviewed the limitation and determined
that, due to the fact that Mr. Friedman is no longer affiliated with the
shareholder group, and had disposed of any shares of the Trust which he or his
affiliates may have owned, the limitation should no longer apply to Mr.
Friedman or his affiliates. The Board of Trustees also determined that there
was no reason to object to the purchase of additional shares of the trust by
the shareholder group and on August 23, 1994, the Trust's Board of Trustees
adopted a resolution 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
<PAGE> 8
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
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
extraordinary gain. . . . $ (.29) $ .20 $ .22 $ (.15) $ (.90)
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

<CAPTION>
December 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
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
</TABLE>

The Trust acquired eight properties in 1994 for a total of $32.7 million and
five properties in 1993 for a total of $16.9 million. See ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA."

27
<PAGE> 9
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 net cash
provided by operating activities 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.

Interest paid on the Trust's notes payable increased from $4.5 million in 1993
to $6.6 million in 1994. This increase is primarily attributable to interest
paid on mortgages secured by properties acquired in 1993 and 1994, and due to
interest paid on borrowings in 1994 and 1993 secured by mortgages on
previously unencumbered properties. The Trust believes that interest paid on
notes payable will continue to increase in 1995 if the Trust continues to
acquire additional properties and/or obtain financing on previously
unencumbered properties.

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
<PAGE> 10
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 expenses applicable to rental income)
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
<PAGE> 11
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------
1994 1993 1992
-------------- ---------------- --------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
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
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
============== ================ ==============
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

38
<PAGE> 12
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, which is included in "Gain on sale
of real estate" on the Trust's Statement of Operations.

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
<PAGE> 13
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:

<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
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
============ ===========
</TABLE>

<TABLE>
<CAPTION>
1994 1993 1992
----------- ------------ -----------
<S> <C> <C> <C>
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)
=========== ============ ===========
</TABLE>

53
<PAGE> 14
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.

For purposes of the Modification requirements, the term "related party
transaction" means and includes (i) any transaction between or among the Trust
or IORT, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any
transaction between or among the Trust, its affiliates or subsidiaries and the
Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates and (iii) any
transaction between or among the Trust or any of its affiliates or subsidiaries
and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of
their affiliates has an ongoing or contemplated business or financial
transaction or relationship of any kind, whether direct or indirect, or has had
such a transaction or relationship in the preceding one year.

The Modification requirements for related party transactions do not apply to
direct contractual agreements for services between the Trust and the Advisor or
one of its affiliates (i.e. the Advisory Agreement, Property Management
Contracts, etc.). These agreements require the prior approval by two-thirds of
the Trustees of the Trust, and if required, approval by a majority of the
shareholders. The Modification requirements for related party transactions also
do not apply to joint ventures between or among the Trust and IORT, NIRT or TCI
or any of their affiliates or subsidiaries and a third party having no prior or
intended future business or financial relatioship with Mr. Phillips, Mr.
Friedman, the Advisor, or any affiliate of such parties. Such joint ventures
may be entered into on the affirmative vote of a majority of the Trustees of
the Trust.

61
<PAGE> 15
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 or results of operations.

62
<PAGE> 16
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1994

<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
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(2)
Miami, FL
Northwest Crossing.... - 1,238 - - 1,238 - 1,238
Houston, TX
Round Mt.............. - 5,740 - 94 5,834 - 5,834(2)
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
========
</TABLE>

Life On Which
Depreciation
in Latest
Statement

Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- ----------------- ------------ ------------ -------- -----------

<S> <C> <C> <C> <C>
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
=======

</TABLE>

_____________________________

(1) The aggregate cost for federal income tax purposes is $165,261.
(2) An allowance for estimated losses has been provided to reduce the carrying
value of this property to the Trust's estimate of fair value minus estimated
costs of sale.

65
<PAGE> 17
SCHEDULE IV

CONTINENTAL MORTGAGE AND EQUITY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994

<TABLE>
<CAPTION>
Interest Maturity
Description Rate Date Periodic Payment Terms
- --------------- ------ -------- --------------------------------------------------
<S> <C> <C> <C>
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)
<S> <C> <C> <C> <C>
FIRST MORTGAGE LOANS

Alderwood $ - $1,541 $ 1,541 $1,541
- ---------
secured by apartment
complex in Detroit, MI.

Buena Vista Office - 700 700(2) 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(2) 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(2) -
- ----------------------
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(2) -
- ---------------------
7 mortgages secured
by 7 homes in AZ, MA,
CO and HI.
</TABLE>

67
<PAGE> 18
SCHEDULE IV
(Continued)

CONTINENTAL MORTGAGE AND EQUITY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994

Aspen Village Prime 4/92 Monthly interest payments
- -------------
secured by townhomes +1.50%
in Hartland, WI.

Aspen Village $ 3,400 $2,150 $ 2,150(2) $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
=======
</TABLE>

__________________________

(1) The aggregate cost for federal income tax purposes is $11,696.
(2) An allowance for estimated losses has been provided to reduce the carrying
value of this mortgage to the Trust's estimate of net realizable value of
the collateral securing such note.

68
<PAGE> 19
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.

<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- --------------------------- ----------------- ----------
<S> <C> <C>
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
</TABLE>

_________________________

(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.

<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- --------------------------- ----------------- ----------
<S> <C> <C>
All Trustees and Executive 1,266,709 (2) 43.4%
Officers as a group
(12 individuals)
</TABLE>

___________________________

* 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. Each of the directors of ART, Oscar W. Cashwell,
Ryan T. Phillips, Al Gonzalez and Dale A. Crenwelge, may be deemed to be
beneficial owners of the shares owned by ART by virtue of their positions
as directors of ART. Each of the directors of BCM, Ryan T. Phillips and
M. Ned Phillips, may be deemed to be beneficial owners of the shares
owned by BCM by virtue of their positions as directors of BCM. The
directors of ART and BCM disclaim such beneficial ownership.

85
<PAGE> 20
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)

Exhibit
Number Description
- ------- ---------------------------------------------------------------------
<S> <C>
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.

99.0 Modification of Stipulation of Settlement Olive et al. v. National
Income Realty Trust et al. entered into as of April 27, 1994, filed
herewith.

(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.

</TABLE>

91
<PAGE> 21
CONTINENTAL MORTGAGE AND EQUITY TRUST

EXHIBITS TO
ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 1994

<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------------- ------
<S> <C> <C>
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

99.0 Modification of Stipulation of Settlement Olive 129
et al. v. National Income Realty Trust et al.
entered into as of April 27, 1994.
</TABLE>

<PAGE> 1

EXHIBIT 99.0

[Names and Addresses of Counsel
Appear on Signature Page]

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

JACK OLIVE, JONATHAN NOBLE, M.D., JOHN ) Case No. C 89 4331 MHP
P. PEDJOE and ALLSOP, INC. PROFIT )
SHARING PLAN & TRUST, on behalf of ) CLASS AND DERIVATIVE ACTION
themselves and all others similarly )
situated and derivatively on behalf of ) MODIFICATION OF STIPULATION OF
NATIONAL INCOME REALTY TRUST, a ) SETTLEMENT
California business trust, CONTINENTAL )
MORTGAGE AND EQUITY TRUST, a California )
business trust, TRANSCONTINENTAL REALTY )
INVESTORS, a California business trust, )
and INCOME OPPORTUNITY REALTY TRUST, a )
California business trust, )
)
Plaintiffs, )
)
VS. )
)
GENE E. PHILLIPS; WILLIAM S. FRIEDMAN; )
RICHARD N. LAPP; MICHAEL E. SMITH; )
WILLIE K. DAVIS; RAYMOND V. J. SCHRAG; )
RANDALL K. GONZALEZ; JAMES W. HAMMOND, )
JR.; NATIONAL REALTY ADVISORS, INC., a )
Texas corporation; NATIONAL REALTY, )
L.P., )
)
)
)
- - caption continues - - )

129
<PAGE> 2
a Delaware limited partnership; )
AMERICAN REALTY TRUST, INC., a Georgia )
corporation; NATIONAL OPERATING L.P., )
a Delaware limited partnership; )
)
Defendants, )
)
-and- )
)
NATIONAL INCOME REALTY TRUST, a )
California business trust; CONTINENTAL )
MORTGAGE AND EQUITY TRUST, a California )
business trust; TRANSCONTINENTAL REALTY )
INVESTORS, a California business trust; )
and INCOME OPPORTUNITY REALTY TRUST, a )
California business trust; )
)
Nominal Defendants. )
________________________________________)

This Modification of Stipulation of Settlement (the "Modification") is
made and entered into as of April 27, 1994 by and among (i) Settlement Counsel,
on behalf of the Trusts, (ii) the Trusts, and (iii) the Released Parties whose
names appear on the signature pages, as all such terms are herein defined, by
and through their attorneys of record in the above-captioned action.

WHEREAS, on May 3, 1989, the action captioned Olive v. Phillips, et
al., Case No. 650959-6 (the "Olive Action"), was filed in the Superior Court of
California, County of Alameda (the "State Court"), as a class action on behalf
of all persons who owned shares in National Income Realty Trust, formerly known
as Consolidated Capital Income Trust ("NIRT"), against, inter alia, certain of
the trustees of NIRT;

WHEREAS, on July 19, 1989, the action captioned Noble v. Phillips, et
al., Case No. 653796-8 (the "Noble Action"), was filed in State Court as a
class action on behalf of all persons

130
<PAGE> 3
who owned shares in Continental Mortgage and Equity Trust, formerly known as
Consolidated Capital Special Trust ("CMET") against, inter alia, certain of the
trustees of CMET;

WHEREAS, on December 8, 1989, the action captioned Olive and Noble v.
Phillips, et al., Case No. C 89 4331 MHP (the "Federal Action") was filed in
the United States District Court for the Northern District of California (the
"District Court") as a class action on behalf of all shareholders of record of
NIRT and CMET as of November 13, 1989, excluding the defendants therein named,
against, inter alia, the then current trustees of NIRT and CMET;

WHEREAS, on or about February 26, 1990, the Class Representatives
filed an amended complaint in the Federal Action (the "Amended Complaint") (i)
enlarging the proposed class to include shareholders of record of
Transcontinental Realty Investors, formerly known as Johnstown/Consolidated
Realty Trust and now known as Transcontinental Realty Investors, Inc. ("TCI"),
and Income Opportunity Realty Trust ("IORT"), (ii) incorporating on behalf of
the expanded class the claims asserted by the plaintiffs in the State Court
actions, (iii) alleging derivative claims on behalf of the Trusts, and (iv)
dismissing the State Court actions described above;

WHEREAS, a Stipulation of Settlement, a copy of which is attached
hereto as Exhibit A (the "Stipulation") was executed on or about February 21,
1990 which settled all of the claims asserted in the Amended Complaint;

WHEREAS, in February of 1991, the Class Representatives brought a
motion in the Federal Action for the appointment of a

131

MODIFICATION OF STIPULATION OF SETTLEMENT
<PAGE> 4
receiver for alleged violations of the Stipulation;

WHEREAS, in March of 1991, the District Court appointed a Special
Master to consider the allegations of the motion;

WHEREAS, in May of 1991, the Special Master held hearings on the
motion;

WHEREAS, on July 26, 1991, the Special Master issued his report to the
District Court;

WHEREAS, on November 27, 1991, the District Court reviewed the
findings of the Special Master and ordered monitoring by the Special Master for
a period of one year;

WHEREAS, on December 8, 1992, the District Court ordered further
hearings on defendants' compliance with the Stipulation and the Court's
November 27, 1991 order (the "Related Order");

WHEREAS, on February 9 and 10, 1993 and April 12 through 20, 1993, the
District Court held evidentiary hearings on the status of the Trusts and
Settlement Counsel's allegations of continuing breaches of the Stipulation and
Related order (the "Hearings");

WHEREAS, Settlement Counsel has claimed and continues to claim that
the Stipulation and Related Order have been and are being breached;

WHEREAS, the Released Parties whose names appear on the signature
pages have claimed and continue to claim that the allegations of breach of the
Stipulation and Related Order are without merit;

WHEREAS, Settlement Counsel recognizes and has taken into account the
expense and length of proceedings necessary to

132

MODIFICATION OF STIPULATION OF SETTLEMENT
<PAGE> 5
complete the Hearings and the uncertain outcome and the risk of litigation;

WHEREAS, the Trusts and the Released Parties have taken into account
the expense and length of proceedings necessary to complete the Hearings and
the uncertain outcome and the risk of litigation;

WHEREAS, each of the Released Parties has denied and continues to deny
any wrongdoing whatsoever;

WHEREAS, the Trusts and the Released Parties whose names appear on the
signature pages have concluded that it is desirable that the claims asserted
against the Released Parties be settled in order to avoid the expense,
inconvenience, distraction and risk of further legal proceedings;

NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED, by and among
Settlement Counsel, on behalf of the Trusts, the Trusts, and the Released
Parties whose names appear on the signature pages, by and through their
respective attorneys of record, that the Stipulation be modified as follows:

A. Definitions

As used in this Modification, the following terms have the meanings
specified below:

(1) "Class Representatives" means the named plaintiffs Jack
Olive, Jonathan Noble, John P. Pedjoe, and Allsop, Inc. Profit Sharing Plan &
Trust.

(2) "Effective Date" is the date on which the settlement embodied
in this Modification becomes "effective," which is the date on which the
District Court's judgment, substantially in the form of Exhibit B hereto,
becomes final,

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i.e., the date of the final affirmance on appeal, the expiration of the time
for petitions for writs of certiorari to the Supreme Court of the United States
and, if certiorari be granted, the date of final affirmance following review
pursuant to that grant; or the final dismissal of any appeal or proceedings on
certiorari to the Supreme Court of the United States; or the expiration, in the
absence of the filing or noticing of any appeal or petition for a writ of
certiorari to the Supreme Court of the United States, of the time to appeal or
petition from the District Court's judgment.

(3) "Person" means any individual, corporation,
partnership, limited partnership, association, joint stock company, estate,
legal representative, trust, unincorporated organization, and any other type of
legal entity and their heirs, successors, or assigns.

(4) "Settled Claims" means any and all claims, actions or
causes of action of whatever nature, character or description, whether known,
unknown, suspected or unsuspected, that could or do arise out of or are or
could be in any way based on, connected with or related to any of the matters
raised at the Hearings or the proceedings before the Special Master in May of
1991, including those matters raised in the post-hearing memorandum filed on
June 11, 1993 that was stricken by the District Court, all as more particularly
described in Exhibit C hereto.

(5) "Settlement Counsel" means the Law Offices of George
Donaldson, 235 Pine Street, Suite 825, San Francisco, California 94104.

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(6) "Trusts" means collectively NIRT, CMET, TCI and IORT.

(7) "Trustees" or "Boards of Trustees" means the persons
acting as trustees of NIRT, CMET, and IORT, and/or as directors of TCI.

(8) "Released Parties" means collectively Gene E.
Phillips, William S. Friedman, Michael E. Smith, Willie K. Davis, Raymond V. J.
Schrag, Randall K. Gonzalez, A. Bob Jordan, Geoffrey C. Etnire, Bennett B.
Sims, Ted P. Stokeley, Dan Johnston, Richard N. Lapp, James W. Hammond, Jr.,
Basic Capital Management, Inc. (formerly named National Realty Advisors, Inc.),
National Realty, L.P., American Realty Trust, Inc., National Operating, L.P.,
Medical Resource Companies of America, James Gilley, Tarragon Capital
Corporation, Tarragon Partners, Ltd., and all of their officers, directors, and
employees.

B. Operative Settlement Terms

(1) The Board of Trustees of NIRT shall be reduced from
ten to seven members. No more than four current board members, including
Friedman and Johnston, will remain. Three new unaffiliated Trustees will be
appointed consistent with the provisions hereof. In order to facilitate the
appointment of Trustees who meet the requirements of Paragraph B.(4), two
Trustees, as identified on Exhibit D, which shall be filed under seal, who have
professional or business relationships with Friedman, Phillips or their
affiliates, either personally or by virtue of close family ties, have agreed
voluntarily to not stand for re-election as Trustees of NIRT (or to resign
prior to the next shareholders' meeting). Etnire will resign from the Board

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of Trustees of NIRT upon approval and appointment of the new unaffiliated
Trustees, as provided hereunder, and John A. Doyle shall immediately resign
from said Board. Once constituted, the new Board will elect a Chairman who is
unaffiliated with NIRT's advisor.

(2) The Boards of CMET, IORT, and TCI shall be reduced
from eight to seven members. No more than four current Board members, including
Johnston and Etnire, will remain on each such Board. Three new unaffiliated
Board members will be appointed for each such Board consistent with the
provisions hereof. It is understood that Friedman has previously resigned from
the Boards of CMET, IORT and TCI, and he will not stand for re-election to such
Boards. In order to facilitate the appointment of Trustees who meet the
requirements of Paragraph B.(4), two Trustees, as identified on Exhibit D
hereto, who have professional or business relationships with Friedman, Phillips
or their affiliates, either personally or by virtue of close family ties, have
agreed voluntarily to not stand for re-election as Trustees of CMET, IORT or
TCI (or to resign prior to the next shareholders' meetings).

(3) Candidates to be the new Board members required by
the foregoing paragraphs may be submitted by any current member of the Boards
of Trustees. Candidates shall be submitted to, and screened and interviewed by,
a Screening Committee comprised of Trustees Stokeley, Sims, Johnston and
Etnire. The Screening Committee will forward the names of all candidates along
with the results of their screening to the full Boards and Settlement Counsel,
and the final selections shall be made by the full

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Boards. A good faith effort will be made to select new Trustees with
significant knowledge and experience in real estate, financial management,
and/or management of public companies. The Boards shall select the new
candidates within 60 days of the execution of this Modification. Any person
selected by a Board to serve as a new unaffiliated Trustee shall be made
available and shall agree to be made so available for examination under oath by
Settlement Counsel and for interview and approval by the District Court. Prior
to interview and approval by the District Court, any party may submit to the
Special Master the names of the proposed Board nominees and any materials
adduced in the selection process. Proposed new Board members selected will be
appointed to the Board as they are approved by the District Court. Current
Board members who will not continue to serve in such capacity or capacities
will not stand for reelection at the next annual meetings of shareholders.
Should the District Court not approve one or more of the proposed new Board
members from the group initially presented for the District Court's approval
(the "First Group Selections"), new candidates to replace any non-approved
selection, who may be submitted by any current Board member or who were
previously considered but not chosen to be First Group Selections, shall be
submitted to, and screened and interviewed by, the Screening Committee. The
Screening Committee will forward the names of all new candidates to the full
Boards and Settlement Counsel, and the final selection(s) shall be made
by the full Boards. Should the District Court not approve one or more
of the new selections (the "Second Group Selections"), then the names of all
persons considered by the Screening Committee,

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whether or not approved by the full Boards to be either First Group or Second
Group Selections, shall be submitted to the District Court, which shall make
the final selections from the entire pool after completion of the examination
and interview process described above. In the event the District Court does not
approve a Second Group Selection and, pursuant to the terms hereof, makes any
appointment from the entire pool of candidates, the Board of any Trust with
respect to which the District Court has made such appointment may withdraw from
the Modification. If the Board of any Trust chooses to withdraw from the
Modification, there will be no Effective Date as to any Trust and the Advisor
for the Trust withdrawing shall be responsible for payment of the attorneys'
fees and costs of Settlement Counsel arising from the proposed Modification. If
a Trust withdraws from the Settlement under the terms hereof, the terms of
Paragraph G.(2) below shall apply to all Trusts.

(4) All of the new Trustees nominated and/or selected
pursuant to the foregoing paragraphs shall have had (i) no social or personal
relationship that would compromise their independence (ii) no familial
relationship, (iii) no material financial or business relationship of any kind,
whether direct or indirect, with Phillips, Friedman, the entities engaged to
advise the Trusts ("Advisor") or any affiliate of such person or persons.

(5) All unaffiliated Trustees, including the new
Trustees, shall hereafter have no material financial or business relationship
of any kind, whether direct or indirect, with the Advisor, Phillips, Friedman,
or any affiliate of such person or persons except to the sole extent of serving
as Trustees, with

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material defined for these purposes as having a value of more than $1,000 per
year. If prohibited relationships exist as of the date of execution of this
Modification as to any of the current unaffiliated Trustees, such relationships
shall be eliminated within six months of the Effective Date.

(6) Certain transactions shall be handled in the future
as follows:

a) All related party transactions involving the
Trusts and their assets shall hereafter be discouraged, shall only be
undertaken in exceptional circumstances and shall for a period of five years
from the execution of this Modification require the unanimous approval of the
Board of Trustees of each involved Trust. In addition, such transactions may be
approved only after a determination by the appropriate Board or Boards that the
transaction is not only in the best interests of the Trust or Trusts involved
but that no other opportunity exists that is as good as the opportunity
presented by such transaction. For purposes of this provision and except for
those transactions embraced by subparagraphs b) and c) hereof, the term
"related party transaction" shall mean and include (i) any transaction between
or among one Trust and another Trust or any of their affiliates or
subsidiaries; (ii) any transaction between or among a Trust, its affiliates or
subsidiaries and the Advisor, Phillips, Friedman or any of their affiliates;
and (iii) any transaction between or among a Trust or any of its affiliates or
subsidiaries and a third party with whom the Advisor, Phillips, Friedman or any
of their affiliates has an ongoing or contemplated business or financial
transaction or relationship of

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any kind, whether direct or indirect, or has had such a transaction or
relationship in the preceding one year.

b) Direct contractual agreements for services between
the Trust and the Advisor or one of its affiliates (i.e., the Advisory
Agreement, Property Management Contracts, etc.) shall require prior approval by
two-thirds of the Trustees of the subject Trust, and, if required, approval by
a majority of the shareholders.

c) Joint ventures between or among two or more of the
Trusts or any of their affiliates or subsidiaries and a third party having no
prior or intended future business or financial relationship with Phillips,
Friedman, the Advisor, or any affiliate of such parties may be entered into on
the affirmative vote of a majority of the Trustees of each subject Trust.

d) In the case of any transaction otherwise embraced by
subparagraph a)(iii) above but which involved a third party whose prior
transaction or relationship occurred more than one year but less than ten years
from the date of the current transaction but no earlier than January 1, 1989
for prior transactions involving one or more of the Trusts, the circumstances
of such prior transaction or relationship shall be fully disclosed to the Board
by the Advisor, and the Advisor and third party shall certify under oath that
there is no connection, explicit or implicit, direct or indirect, between the
current transaction and the prior transaction or relationship. The foregoing
shall not apply to incidental administrative services or property management
transactions in which the third party

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solely provides equipment, services, supplies, property repairs, or maintenance
and no third party certification shall be required from government agencies,
government sponsored agencies or their agents. Absent full compliance with the
requirement of this subparagraph, such transaction shall be deemed to be a
"related party transaction," as defined above, and thus shall be governed by
the requirements of subparagraph a) above.

(7) Notwithstanding the foregoing, no Trust funds,
properties or assets shall be used, either directly or indirectly, to resolve
or settle any claim that might be asserted or is presently asserted against the
Advisor, Phillips, Friedman or any of their affiliates, unless such claim is
also jointly asserted against a Trust or Trusts with which such person is
associated, arises out of the business activities of such Trust or Trusts and
asserts liability against such Trust or Trusts that is co-extensive with the
liability asserted against such person or persons.

(8) Basic Capital Management, Inc. ("BCM"), Phillips and
Friedman shall pay $1.2 million to the Trusts, as further provided in Exhibit
N, to be apportioned as the current Boards determine. BCM, Phillips and
Friedman shall be jointly and severally liable to make an initial payment of
$300,000 within five days of the date of the execution of this Modification.
Thereafter, BCM, Phillips and Friedman shall make monthly payments of $50,000
per month commencing on the first day of the month following the Effective Date
and continuing on the first day of each succeeding month until paid in full. To
secure payment of the funds pursuant to this paragraph, Phillips and BCM

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shall execute a stipulated judgment (substantially in the form of Exhibit E
attached hereto) in the amount of $2.5 million, which judgment (reduced by the
amount of any prior payments) shall be entered by the District Court and shall
become final and not appealable if any required payment is not made within five
days of its due date. In addition, to secure payment of the funds required
hereunder, Friedman shall execute a separate stipulated judgment (substantially
in the form of Exhibit F attached hereto), in the amount of $300,000, which
judgment shall be reduced proportionately on each monthly payment made
hereunder and which judgment shall be entered by the District Court and shall
become final and not appealable if any required payment is not made within five
days of its due date.

(9) The Trusts, and the shareholders of the Trusts in
their derivative capacity, shall release the Released Parties from any and all
claims arising out of any transaction discussed or dealt with at the Hearings
or in the post hearing memoranda. Such release shall be in the form of Exhibit
G attached hereto.

(10) The Trusts shall not interfere with the Class
Representatives and Settlement Counsel in the pursuit of any claims brought on
behalf of the Trusts against certain persons and entities, as more particularly
described in Exhibit H hereto, which shall be filed under seal with the
District Court. The Trusts expressly agree that plaintiffs shall not be
required to make a demand on the Board of Trustees of any of the Trusts in
connection with the initiation of such litigation, said demand being deemed to
have been expressly waived. The Trusts and Released Parties expressly agree to
promptly comply with regard

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to all requests for documents or other information concerning such claims made
by the Class Representatives or Settlement Counsel, and all such documents or
information, including that previously produced, may be used in the pursuit of
such claims.

(11) Should the Trusts settle any of their claims against
any of the third parties listed in paragraph B.10 above, Settlement Counsel
shall require as a condition of such settlement that such third party provide a
release of all of the Released Parties, provided that the Released Parties
simultaneously deliver a mutual release to such settling third party.

(12) Exhibit D referenced in the Southmark Side Agreement
shall be completed consistent with the testimony and representations made at
the Hearings and shall be appended hereto as Exhibit I. All fees and expenses
incurred in the bankruptcy litigation arising out of the Northtown Mall
property shall be paid in accordance with Exhibit I hereto.

(13) A committee of the Boards of the Trusts, comprised of
three of the new Trustees to be appointed hereunder, shall investigate and
promptly report to the Boards of the Trusts on whether any monies were
improperly transferred in connection with the Northtown Mall property and, if
so, shall demand immediately recompense from the appropriate parties.

(14) All Trust shares owned or controlled by Phillips,
Friedman, their family members, and/or their affiliates shall be voted a) at
all succeeding shareholders' meetings held during the two calendar years
following the Effective Date of this Modification in favor of all of the
current Board members who are

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not agreeing hereunder to discontinue their service as Trustees, and b) at all
succeeding shareholders' meetings held during the three calendar years
following the Effective Date of this Modification in favor of all new Trustees
appointed hereunder. During the three calendar years following the Effective
Date of this modification, the Boards shall not be enlarged, and should any of
the new Trustees appointed hereunder resign, replacement Trustees shall be
appointed in accordance with the requirements of Paragraph B.(3) above.

(15) The current Boards of Trustees shall, during the
selection process set forth in Paragraph B.(3) above, exercise their best
efforts to obtain reasonable directors and officers insurance coverage for the
Trustees.

(16) Further provisions of this Modification, set forth in
Exhibits D, H and M, have been placed under seal with the District Court.

(17) The District Court shall retain jurisdiction to
enforce this Modification. However, no motion, request, claim, action, or
hearing concerning this Modification, its terms, its implementation, its
breach, or its enforcement may be brought by any person, entity, shareholder,
lawyer or other person, including the Class Representatives and Settlement
Counsel, unless the following procedure is followed:

a) Any person seeking to request that the
District Court exercise its retained jurisdiction must notify the Board of
Trustees of any involved Trust in writing.

b) The writing must identify in reasonable
specificity the person's complaint and the relief he or she

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intends to seek.

c) A petition to the District Court may be made
only if after 45 days from service of the written notice identified above, the
Board of Trustees either fails to respond or in response fails to provide the
relief requested. Such petition may be directed only at the Trust, Trusts,
Trustees, or related persons or entities involved in the alleged violation.

d) If the objecting party invokes the
jurisdiction of the District Court and any proceedings are had, the prevailing
party, as determined by the District Court, shall be entitled to attorneys'
fees and costs.

e) The prevailing party for purposes of this
provision shall be the Trusts if the relief awarded by the District court is
less than the relief offered by the Trusts before the proceedings were
initiated.

C. The Notice Order

Promptly after the execution of this Modification, Settlement
Counsel shall file this Modification with the Clerk of the District Court and
move the District Court for an order, substantially in the form of Exhibit J
hereto (the "Notice Order"), providing for notice of and hearing on the
proposed settlement. The Notice Order shall specifically include provisions
which:

(1) Preliminarily approve the proposed
settlement embodied in this Modification as being within the range of fairness
and reasonableness;

(2) Approve a form of notice for mailing to the
shareholders of the Trusts, substantially in the form of Exhibit

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K hereto, that notifies such persons of the hearing on approval of the
settlement (the "Settlement Notice");

(3) Approve a form of summary notice of the hearing on
the proposed settlement for publication to the shareholders of the Trusts,
substantially in the form of Exhibit L hereto (the "Summary Notice");

(4) Direct the Trusts to mail or cause to be mailed the
Settlement Notice to those shareholders of the Trusts who can be identified
through reasonable effort;

(5) Direct Settlement Counsel, at the Trusts' expense, to
cause the Summary Notice to be published on one occasion in the national
edition of The Wall Street Journal;

(6) Find that mailing and publication pursuant to
Paragraphs (4) and (5) above constitute the best notice practicable under the
circumstances including individual notice to all shareholders of the Trusts who
can be identified through reasonable effort, are due and sufficient notice of
the matters set forth in the Settlement Notice to all such persons, and fully
satisfy the requirements of due process and Rule 23.1 of the Federal Rules of
Civil Procedure;

(7) Schedule a hearing (the "Settlement Hearing") to
determine whether the proposed settlement embodied in this Modification should
be finally approved as fair, reasonable and adequate and whether an order
approving the settlement should be entered thereon; and

(8) Provide that any objections to the proposed
settlement shall be heard and any papers submitted in support of said
objections shall be received and considered by the District

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Court at the Settlement Hearing (unless, in its discretion, the District Court
shall otherwise direct) only if, on or before a date to be specified in the
Notice Order, persons making objections shall file notice of their intention to
appear and copies of any papers in support of their position with the Clerk of
the District Court and serve such notice and papers on counsel to the parties
to this Modification.

D. Judgment to be Entered by the District Court Approving
the Settlement

Upon approval by the District Court of the settlement, as
herein contemplated, a judgment shall be entered, substantially in the form of
Exhibit B hereto, which shall:

(1) Approve the settlement embodied in this Modification
as fair, reasonable and adequate to the Trusts;

(2) Adjudge that the Trusts, and the shareholders of the
Trusts in their derivative capacity, shall be deemed conclusively to have
released the Settled Claims against the Released Parties;

(3) Bar and permanently enjoin the Trusts from
prosecuting the Settled Claims against the Released Parties;

(4) Reserve jurisdiction, without affecting the finality
of the judgment entered, over: (a) implementation of the settlement embodied in
this Modification and any distribution or disposition of the consideration
transferred hereunder; (b) any hearing and/or determination on the applications
of Settlement Counsel for an award of attorneys' fees and expenses; and (c)
enforcing and administering this Modification.

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E. Conditions of Settlement

(1) This Modification shall be effective only on the
condition that all of the following events occur:

(a) The Trustees of the Trusts carry out the
obligations of paragraphs B.1 and B.2;

(b) The Advisor and/or its affiliates carry out
the initial funding obligations set forth in Paragraph B.8;

(d) The District Court enters the Final Judgment;
and

(e) There is an Effective Date.

(2) Upon the occurrence of all of the events referenced
above, the releases shall become effective without regard to the subsequent
discovery or existence of such different or additional facts.

F. Attorneys' Fees and Expenses

The parties shall use their best efforts to agree on a reasonable
award of attorneys' fees and expenses to Settlement Counsel for their services
in connection with the matters leading up to this Modification, in which event
Settlement Counsel shall apply to the District Court for an award that does not
exceed the agreed-upon amount. Should the parties be unable to agree,
Settlement Counsel shall move the District Court for an award of attorneys'
fees and expenses in whatever amount they deem appropriate. In either event,
the Trusts shall be obligated to and shall pay the award of attorneys' fees and
expenses approved by the District Court no later than five (5) days after the
Effective Date, unless a party appeals the District Court's

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decision in this regard, in which event the Trusts shall be obligated to and
shall pay whatever award is finally determined.

G. Effect of Disapproval, Cancellation or Termination

(1) If the District Court does not enter the judgment or
if the District Court enters the judgment and appellate review is sought and on
such review such judgment is materially modified or reversed, then this
Modification shall not be cancelled and terminated if all parties to this
Modification who are adversely affected thereby, within thirty (30) days from
the date of the mailing of such ruling to such parties, provide written notice
to all other parties hereto of their intent to proceed with this Modification.
Such notice may be provided on behalf of each party to this Modification by
their counsel and, on behalf of the Trusts, by Settlement Counsel.

(2) If the Effective Date does not occur, or if this
Modification is terminated or cancelled pursuant to its terms, the parties to
this Modification shall be deemed to have reverted to their respective status
as of the date and time immediately prior to the execution of this
Modification, and they shall proceed in all respects as if this Modification
had not been executed.

H. Miscellaneous Provisions

(1) The requirements embodied in Paragraphs 10.C.(1), (2)
and (3) of the Stipulation are hereby extinguished and modified by the
provisions hereof.

(2) The parties hereto agree to cooperate to the extent
necessary to effectuate all terms and conditions of this Modification.

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(3) All of the exhibits attached hereto are hereby
incorporated by this reference as though fully set forth herein.

(4) This Modification may be amended or modified only by
a written instrument signed by all parties, their successors-in-interest or
their counsel of record.

(5) This Modification and the exhibits attached hereto
constitute the entire agreement among the parties hereto and no
representations, warranties or inducements have been made to any party
concerning this Modification or its exhibits other than the representations,
warranties and covenants contained and memorialized in such documents.

(6) Settlement Counsel, on behalf of the Trusts, are
expressly authorized to take all appropriate action required or permitted to be
taken by them pursuant to this Modification to effectuate its terms and are
also expressly authorized to enter into any modifications or amendments to this
Modification which they deem appropriate.

(7) Counsel for the Released Parties whose names appear
on the signature pages are authorized to sign this Modification on behalf of
their respective clients and on behalf of the Trusts.

(8) This Modification may be executed in one or more
counterparts. All executed counterparts and each of them shall be deemed to be
one and the same instrument. Counsel for the parties to this Modification shall
exchange among themselves original signed counterparts and a complete set of
original executed counterparts shall be filed with the District Court.

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(9) This Modification shall be binding upon, and inure to
the benefit of, the successors and assigns of the parties hereto.

(10) All terms of this Modification and the exhibits
hereto shall be governed by and interpreted according to the laws of the State
of California.

(11) All parties shall use best efforts to perform all
terms of this Modification.

IN WITNESS WHEREOF, the parties hereto have caused this modification
to be executed, by their duly authorized attorneys, as of the date and year
first above written.

LAW OFFICES OF GEORGE DONALDSON
235 Pine Street, Suite 825
San Francisco, CA 94104

Dated: 5-4-94 By: /s/ GEORGE DONALDSON
George Donaldson

Attorneys for the Class
Representatives, derivatively on
behalf of the Trusts

LAW OFFICES OF JOSEPH L. ALIOTO
650 California Street
25th Floor
San Francisco, CA 94104

Dated: April 28, 1994 By: /s/ JOSEPH L. ALIOTO
Joseph L. Alioto

Attorneys for Gene E. Phillips

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<PAGE> 24

ORRICK, HERRINGTON & SUTCLIFFE
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco CA 94111

Dated: 4-28-94 By: /s/ MICHAEL D. TORPEY
Michael D. Torpey

Attorneys for William S. Friedman,
Basic Capital Management, Inc. and
the Trusts

HOWARD, RICE, NEMEROVSKI, CANADY,
ROBERTSON, FALK & RABKIN
450 Newport Center Drive
Suite 550
Newport Beach, CA 92660

Dated: April 28, 1994 By: /s/ ROBERT E. GOODING, JR.
Robert E. Gooding, Jr.

Attorneys for the Unaffiliated
Trustees of the Trusts (with the
exception of Geoffrey Etnire)

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