<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1995
Commission File Number 0-10503
CONTINENTAL MORTGAGE AND EQUITY TRUST
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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 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 15, 1996, the Registrant had 4,246,868 shares of beneficial
interest outstanding. Of the total shares outstanding, 2,149,254 were held by
other than those who may be deemed to be affiliates, for an aggregate value of
$20,686,570 based on the last trade as reported on The Nasdaq Stock Market on
March 15, 1996. 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
INDEX TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I
------
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 7
Item 3. Legal Proceedings............................................. 21
Item 4. Submission of Matters to a Vote of Security Holders .......... 23
PART II
-------
Item 5. Market for Registrant's Shares of Beneficial
Interest and Related Shareholder Matters................... 23
Item 6. Selected Financial Data....................................... 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 26
Item 8. Financial Statements and Supplementary Data................... 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 66
PART III
--------
Item 10. Trustees, Executive Officers and Advisor of the
Registrant................................................. 66
Item 11. Executive Compensation........................................ 75
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 78
Item 13. Certain Relationships and Related Transactions................ 79
PART IV
-------
Item 14. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K.......................... 83
Signature Page............................................................ 85
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
Continental Mortgage and Equity Trust (the "Trust" or the "Registrant") is a
California business trust organized pursuant to a declaration of trust dated
August 27, 1980, and amended and restated as of May 27, 1987 (as amended
through the date hereof, the "Declaration of Trust"). The Trust commenced
operations on December 3, 1980. The Trust has elected to be treated as a Real
Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended. The Trust has, in the opinion of the Trust's
management, qualified for federal taxation as a REIT for each year subsequent
to December 31, 1980.
The Trust's real estate portfolio at December 31, 1995 consisted of 39
properties held for investment, two equity method real estate partnerships
(owning 31 industrial warehouse facilities and two office buildings) and eight
properties held for sale, primarily acquired through foreclosure. Seven of the
properties held for investment were purchased during 1995, and one of the
properties held for sale was obtained in 1995 through foreclosure of the
collateral securing a mortgage note receivable. The Trust's mortgage notes
receivable portfolio at December 31, 1995 consisted of 15 mortgage loans. The
Trust's real estate and mortgage notes receivable portfolios are more fully
discussed in ITEM 2. "PROPERTIES."
Business Plan and Investment Policy
The Trust's primary business and only industry segment is investing in equity
interests in real estate through direct acquisitions and partnerships and
financing real estate and real estate related activities through investments in
mortgage loans, including first, wraparound and junior mortgage loans. The
Trust's real estate is located throughout the continental United States.
Information regarding the real estate and mortgage notes receivable portfolios
of the Trust is set forth in ITEM 2. "PROPERTIES" and in Schedules III and IV
to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA".
The Trust's business is not seasonal. The Trust has determined to pursue a
balanced investment policy, seeking both current income and capital
appreciation. With respect to new investments, the Trust's plan of operation
is to continue to make equity investments in real estate and to continue its
program of investing in capital improvements and emphasizing high maintenance
standards with respect to its existing real estate portfolio. The Trust has
determined that it will no longer actively seek to fund or purchase mortgage
loans. It may, however, originate mortgage loans in conjunction with providing
purchase money financing of a property sale. The Trust does intend however, to
service and hold for investment the mortgage notes currently in its portfolio.
The Trust also intends to pursue its rights vigorously with respect to mortgage
notes that are in default.
3
<PAGE> 4
ITEM 1. BUSINESS (Continued)
Business Plan and Investment Policy (Continued)
The type of new real estate investments made by the Trust will depend upon the
availability of suitable real estate investment opportunities. In general, the
Trust intends to be an aggressive and opportunistic investor. In 1996, the
Trust's investment strategy will be to balance its portfolio of apartments with
new leveraged investments in commercial properties (office buildings,
industrial facilities or shopping centers) in the Southeast and Southwest,
where a majority of the Trust's properties are located and where the Trust's
management believes there remains a potential for sustained appreciation. The
Trust will also increase its emphasis on property sales to take advantage of
strengthening real estate markets, selling stabilized properties that have
reached their potential. Further, to obtain additional funds and lock in
current interest rates, mortgage financing will be sought on all of the Trust's
presently unencumbered apartments held for investment, consisting of three
properties as of December 31, 1995 and to refinance properties which are
currently encumbered by mortgage debt that matures in the next two years or
where there is an interest rate advantage to the Trust.
Management of the Trust
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by Basic Capital Management,
Inc. ("BCM" or the "Advisor"), a contractual advisor under the supervision of
the Trust's Board of Trustees. The duties of the Advisor include, among other
things, locating, investigating, evaluating and recommending real estate and
mortgage note investment and sales opportunities as well as financing and
refinancing sources for the Trust. The Advisor also serves as a consultant in
connection with the Trust's business plan and investment policy decisions made
by the Trust's Board of Trustees.
BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips served as a Trustee of the Trust until December 31,
1992. Mr. Phillips also served as a director of BCM until December 22, 1989
and as Chief Executive Officer of BCM until September 1, 1992. Mr. Phillips
serves as a representative of his children's trust which owns BCM and, in such
capacity, has substantial contact with the management of BCM and input with
respect to its performance of advisory services to the Trust. BCM is more
fully described in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor".
BCM has been providing advisory services to the Trust since March 28, 1989.
Renewal of BCM's advisory agreement with the Trust was approved at the annual
meeting of the Trust's shareholders held on March 7, 1995. BCM also serves as
advisor to Income Opportunity Realty Investors, Inc., formerly Income
Opportunity Realty Trust (collectively "IORI") and Transcontinental Realty
Investors, Inc. ("TCI"). The Trustees of the Trust are also directors of IORI
and TCI and the officers of the Trust
4
<PAGE> 5
ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
are also officers of IORI 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. Randall M. Paulson, President of the Trust, also
serves as the President of BCM, IORI, TCI and as the President and a director
of Syntek Asset Management, Inc. ("SAMI"), which is the managing general
partner of SAMLP. The officers of the Trust are also officers of ART. As of
March 15, 1996 ART and BCM owned approximately 38% and 11%, respectively, of
the Trust's outstanding shares of beneficial interest and BCM and the Trust
owned approximately 42% 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 twelve 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
receive property and construction management fees and leasing commissions in
accordance with the terms of its property-level management agreement with
Carmel, Ltd.
Carmel Realty is also entitled to receive real estate brokerage commissions in
accordance with the terms of a nonexclusive brokerage agreement as discussed in
ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT - The
Advisor."
The Trust has no employees. Employees of the Advisor render services to the
Trust.
Competition
The real estate business is highly competitive and the Trust competes with
numerous entities engaged in real estate activities (including certain entities
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Related
Party Transactions"), some of which may have greater financial resources than
those of the Trust. The Trust's management believes that success against such
competition is dependent upon the geographic location of the property, the
performance of property managers in areas such as marketing, collection and the
ability
5
<PAGE> 6
ITEM 1. BUSINESS (Continued)
Competition (Continued)
to control operating expenses, the amount of new construction in the area and
the maintenance and appearance of the property. Additional competitive factors
with respect to commercial properties are the ease of access to the property,
the adequacy of related facilities, such as parking, and sensitivity to market
conditions in setting rent levels. With respect to apartments, competition is
also based upon the design and mix of the units and the ability to provide a
community atmosphere for the tenants. The Trust's management believes that
general economic circumstances and trends and new or renovated properties in
the vicinity of each of the Trust's properties are also competitive factors.
To the extent that the Trust seeks to sell any of its properties, the sales
prices for such properties may be affected by competition from other real
estate entities and financial institutions also attempting to sell their
properties located in areas in which the Trust's properties are located.
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Related Party Transactions", certain of the officers and
Trustees of the Trust also serve as officers and directors of certain other
entities, each of which is also advised by BCM, and each of which has business
objectives similar to the Trust's. The Trust's Trustees, officers and Advisor
owe fiduciary duties to such other entities as well as to the Trust under
applicable law. In determining to which entity a particular investment
opportunity will be allocated, the officers, trustees or directors and the
Advisor consider the respective investment objectives of each such entity and
the appropriateness of a particular investment in light of each such entity's
existing real estate and mortgage notes receivable portfolios. To the extent
that any particular investment opportunity is appropriate to more than one of
such entities, such investment opportunity will be allocated to the entity
which has had funds available for investment for the longest period of time or,
if appropriate, the investment may be shared among all or some of such
entities.
In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships", the Trust also competes with
other entities which are affiliates of the Advisor and which may have
investment objectives similar to the Trust's and that may compete with the
Trust in purchasing, selling, leasing and financing real estate and real estate
related investments. In resolving any potential conflicts of interest which
may arise, the Advisor has informed the Trust that it intends to continue to
exercise its best judgment as to what is fair and reasonable under the
circumstances in accordance with applicable law.
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to all the risks incident to ownership and financing of
real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks
6
<PAGE> 7
ITEM 1. BUSINESS (Continued)
Certain Factors Associated with Real Estate and Related Investments
(Continued)
include, but are not limited to, changes in general or local economic
conditions, changes in interest rates and the availability of permanent
mortgage financing which may render the acquisition, sale or refinancing of a
property difficult or unattractive and which may make debt service burdensome,
changes in real estate and zoning laws, increases in real estate taxes, federal
or local economic or rent controls, floods, earthquakes, hurricanes and other
acts of God and other factors beyond the control of the Trust's management or
Advisor. Also, the illiquidity of real estate investments may impair the
ability of the Trust to respond promptly to changing circumstances. The
Trust's management believes that such risks are partially mitigated by the
diversification by geographic region and property type of the Trust's real
estate and mortgage notes receivable portfolios. However, to the extent
property acquisitions are concentrated in any particular region, the advantages
of diversification may be mitigated.
ITEM 2. PROPERTIES
The Trust's principal offices are located at 10670 North Central Expressway,
Suite 300, Dallas, Texas 75231. In the opinion of the Trust's management, the
Trust's offices are suitable and adequate for its present operations.
Details of the Trust's real estate and mortgage notes receivable portfolios at
December 31, 1995, are set forth in Schedules III and IV, respectively, to the
Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA". The discussions set 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, which were primarily
acquired through foreclosure of the collateral securing mortgage notes
receivable. The Trust holds a fee simple title to all of the properties in its
real estate portfolio. 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.
The Trust's real estate is geographically diversified. At December 31, 1995,
the Trust held investments in apartments and commercial properties in each of
the geographic regions of the continental United States. However, the Trust's
apartments and commercial properties are concentrated in the Southeast and
Southwest regions, as shown more specifically in the table under "Real Estate"
below. At December 31, 1995, the Trust held mortgage notes receivable secured
by real estate located in the Southeast, Southwest and Midwest regions of the
7
<PAGE> 8
ITEM 2. PROPERTIES (Continued)
continental United States with a concentration in the Southeast and Southwest
regions, as shown more specifically in the table under "Mortgage Loans" below.
At December 31, 1995, none of the Trust's properties, partnership investments
or mortgage notes receivable exceeded 10% of the Trust's total assets. At
December 31, 1995, 80% of the Trust's assets consisted of properties held for
investment, 4% consisted of properties held for sale, 6% consisted of
investments in partnerships and 2% consisted of mortgage notes and interest
receivable. The remaining 8% of the Trust's assets were cash, cash
equivalents, marketable equity securities and other assets. The percentage of
the Trust's assets invested in any one category is subject to change and no
assurance can be given that the composition of the Trust's assets in the future
will approximate the percentages listed above.
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> 9
ITEM 2. PROPERTIES (Continued)
Geographic Regions
The Trust has divided the continental United States into the following
geographic regions.
Northeast region comprised of the states of Connecticut, Delaware,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island and Vermont, and the District of Columbia. The Trust has 1
apartment in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The
Trust has 6 apartments and 4 commercial properties in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana,
New Mexico, Oklahoma and Texas. The Trust has 17 apartments and 5
commercial properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, West Virginia and Wisconsin. The Trust has 3 apartments and
2 commercial properties in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Trust has 3 apartments and 1 commercial
property in this region.
Pacific region comprised of the states of California, Oregon and
Washington. The Trust has 2 apartments in this region.
Excluded from the above are three parcels of unimproved land, as described
below.
Real Estate
At December 31, 1995, 90% of the Trust's assets were invested in real estate.
The Trust invests in real estate located throughout the continental United
States, either on a leveraged or nonleveraged basis. The Trust's real estate
portfolio consists of properties held for investment, investments in
partnerships, properties held for sale, which were primarily acquired through
foreclosure of the collateral securing mortgage notes receivable, and
investments in the equity securities of real estate entities.
Types of Real Estate Investments. The Trust's real estate consists of
commercial properties (office buildings, industrial facilities and shopping
centers) and apartments or similar properties having established
income-producing capabilities. In selecting new real estate investments, the
location, age and type of property, gross rentals,
9
<PAGE> 10
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
lease terms, financial and business standing of tenants, operating expenses,
fixed charges, land values and physical condition are among the factors
considered. The Trust may acquire properties subject to or assume existing
debt and may mortgage, pledge or otherwise obtain financing for its properties.
The Trust's Board of Trustees may alter the types of and criteria for selecting
new real estate investments and for obtaining financing without a vote of
shareholders to the extent such policies are not governed by the Trust's
Declaration of Trust.
As of December 31, 1995, the Trust did not have any properties on which
significant capital improvements were in process.
In the opinion of the Trust's management, the properties owned by the Trust are
adequately covered by insurance.
The following table sets forth the percentages, by property type and geographic
region, of the Trust's real estate (other than unimproved land as described
below) at December 31, 1995.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
-------- ---------- ----------
<S> <C> <C>
Northeast...................... 1.4% - %
Southeast...................... 20.4 39.8
Southwest...................... 49.0 39.1
Midwest........................ 16.1 15.4
Mountain....................... 5.6 5.7
Pacific........................ 7.5 -
----- -----
100.0% 100.0%
</TABLE>
The foregoing table is based solely on the number of apartment units and amount
of commercial square footage owned by the Trust and does not reflect the value
of the Trust's investment in each region. The Trust also owns three parcels of
unimproved land, 5 acres located in the Southeast region and 128 acres and 6
acres in the Southwest region. See Schedule III to the Consolidated Financial
Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
for a more detailed description of the Trust's real estate portfolio.
A summary of the activity in the Trust's owned real estate portfolio during
1995 is as follows:
<TABLE>
<S> <C>
Owned properties in real estate portfolio
at January 1, 1995.................................... 40
Properties acquired through purchase...................... 7
Property obtained through foreclosure of collateral
securing a mortgage note receivable................... 1
Property sold............................................. (1)
---
Owned properties in real estate portfolio
at December 31, 1995.................................. 47
</TABLE>
10
<PAGE> 11
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Properties Held for Investment. Set forth below are the Trust's properties
held for investment and the monthly rental rate for apartments and the average
annual rental rate for commercial properties and occupancy thereof at December
31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
Units/ ----------------------- ------------------------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ -------
Apartments
- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Applecreek Dallas, TX 216 units/
225,952 sq. ft. $ .50 $ .48 $ .48 90% 88% 83%
Camelot Largo, FL 120 units/
141,024 sq. ft. .48 .46 .44 93% 98% 97%
Country Crossing Tampa, FL 227 units/
199,952 sq. ft. .51 .48 .46 91% 91% 96%
Edgewood Lansing, IL 353 units/
320,638 sq. ft. .71 .68 .66 94% 94% 93%
El Chapparal San Antonio, TX 190 units/
174,220 sq. ft. .63 .61 .56 92% 93% 100%
Fairways Longview, TX 152 units/
134,176 sq. ft. .50 .48 .37 90% 91% 89%
Forest Ridge Denton, TX 56 units/
65,480 sq. ft. .57 .53 .64 95% 96% 95%
4242 Cedar Springs Dallas, TX 76 units/
60,600 sq. ft. .72 .71 .71 95% 99% 95%
Fountain Lake Texas City, TX 166 units/
161,220 sq. ft. .52 .50 * 90% 95% *
Heritage on the
River Jacksonville, FL 301 units/
289,490 sq. ft. .55 * * 94% * *
In the Pines Gainesville, FL 242 units/
294,860 sq. ft. .48 .44 * 98% 96% *
McCallum Crossing Dallas, TX 322 units/
172,796 sq. ft. .81 .76 * 98% 98% *
McCallum Glen Dallas, TX 275 units/
159,850 sq. ft. .76 * * 95% * *
Park Avenue IV Clute, TX 108 units/
78,708 sq. ft. .50 .48 * 73% 81% *
Park Lane Dallas, TX 97 units/
87,260 sq. ft. .53 .51 .48 92% 93% 89%
Parkwood Knoll San Bernardino, CA 178 units/
149,802 sq. ft. .62 .61 * 98% 93% *
Pierce Tower Denver, CO 57 units/
45,120 sq. ft. .91 .88 * 97% 98% *
Quail Oaks Balch Springs, TX 131 units/
72,848 sq. ft. .58 .53 .52 99% 98% 90%
Ravenswood Stratford, NJ 80 units/
57,707 sq. ft. .72 .71 .70 93% 96% 91%
Somerset Texas City, TX 200 units/
163,368 sq. ft. .60 .52 .49 91% 91% 94%
Southgate Square Roundrock, TX 200 units/
138,436 sq. ft. .74 .70 .59 96% 97% 99%
Stone Oak San Antonio, TX 252 units/
187,686 sq. ft. .58 .55 .51 93% 93% 97%
Sunset Lake Waukegan, IL 414 units/
302,640 sq. ft. .76 .73 * 95% 91% *
Sunset Towers San Francisco, CA 243 units/
171,970 sq. ft. 1.57 1.48 1.40 99% 97% 96%
Willow Creek El Paso, TX 112 units/
103,140 sq. ft. .52 .51 * 80% 94% *
Willo-Wick Gardens Pensacola, FL 152 units/
153,360 sq. ft. .46 * * 66% * *
</TABLE>
11
<PAGE> 12
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
Units/ ------------------------- ------------------------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
Apartments - Continued
- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Willow Wick North Augusta, SC 104 units/
94,128 sq. ft. .47 * * 99% * *
Woodbridge Westminster, CO 194 units/
104,500 sq. ft. .82 .72 * 97% 79% *
Office Buildings
- ----------------
Genesee Towers Flint, MI 171,114 sq. ft. 11.48 12.42 12.52 87% 88% 89%
NASA Office Park Clear Lake, TX 78,159 sq. ft. 10.00 9.74 10.68 55% 63% 66%
Tollhill West Dallas, TX 159,546 sq. ft. 11.85 11.38 11.48 94% 91% 79%
Windsor Plaza Windcrest, TX 80,522 sq. ft. 10.22 9.56 9.01 87% 78% 77%
Industrial Facilities
- ---------------------
Brookfield Corporate
Center Chantilly, VA 63,504 sq. ft. 6.00 * * 85% * *
Kelly Warehouses Dallas, TX 330,334 sq. ft. 2.20 * * 88% * *
McLeod Commerce
Center Orlando, FL 110,914 sq. ft. 6.09 6.08 * 83% 73% *
Northgate
Distribution Marietta, GA 208,386 sq. ft. 3.82 3.70 3.33 89% 100% 76%
Sullyfield
Commerce Center Chantilly, VA 243,813 sq. ft. 5.17 * * 84% * *
Shopping Centers
- ----------------
Builders Square St. Paul, MN 115,492 sq. ft. 2.65 2.65 2.65 100% 100% 100%
Rio Pinar Orlando, FL 113,638 sq. ft. 8.26 8.31 8.08 89% 85% 88%
</TABLE>
_______________________
* Property was purchased in 1994 or 1995.
Occupancy presented above and throughout this ITEM 2. is without reference to
whether leases in effect are at, below or above market rates.
In February 1995, the Trust purchased the Sullyfield Commerce Center, a 243,813
square foot industrial facility in Chantilly, Virginia, for $11.0 million. The
Trust paid $2.2 million in cash and the seller provided mortgage financing of
$8.8 million. The mortgage bears interest at a rate of 6% per annum through
December 1996 and 9% per annum thereafter, requires monthly payments of
interest only through January 1999 and principal and interest payments of
$73,000 thereafter and matures in January 2001. The Trust paid a real estate
brokerage commission of $285,000 to Carmel Realty and an acquisition fee of
$110,000 to BCM based on the $11.0 million purchase price of the property.
Also in February 1995, after determining that further investment in Genesee
Towers, an office building in Flint, Michigan, could not be justified without a
substantial modification of the mortgage debt, the Trust ceased making debt
service payments on the $8.8 million nonrecourse mortgage secured by the
property. Accordingly, as of December 31, 1994, the carrying value of the
property was written down by $1.2 million, which is included in the 1994
provision for losses, to the amount of the nonrecourse mortgage. In February
1996, the Trust and the lender entered into a forbearance agreement that
provides, among other things, that for a period of 90 days, the Trust make
monthly payments of the greater of regular scheduled principal and interest or
cash flow from the property. The deed to the property has been
12
<PAGE> 13
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
placed in escrow during the term of the forbearance agreement. The Trust
anticipates that the property will be returned to the lender at the expiration
of the agreement. The Trust does not anticipate incurring a loss as the
carrying value of the property has been written down to the amount of the
nonrecourse mortgage debt, which approximates the fair value of the property at
December 31, 1995.
In March 1995, the Trust purchased the Kelly Warehouses, six industrial
warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for
$5.4 million. The Trust paid $696,000 in cash, obtained new mortgage
financing of $4.6 million and the seller provided additional financing of
$403,000. The $4.6 million mortgage bears interest at a variable rate, 8.91%
per annum at December 31, 1995, requires monthly payments of interest only and
matures in July 1999. The $403,000 of seller financing bears interest at rates
ranging from 6% to 8% per annum, requires monthly payments of principal and
interest totaling $3,000 and matures in July 1999. The Trust paid a real
estate brokerage commission of $178,000 to Carmel Realty and an acquisition fee
of $54,000 to BCM based on the $5.4 million purchase price.
In May 1995, the Trust purchased the Willo-Wick Gardens Apartments, a 152 unit
apartment complex in Pensacola, Florida, for $3.6 million. The Trust paid
$687,000 in cash, assumed the existing first mortgage of $2.8 million and the
seller provided additional financing of $79,000. The $2.8 million first
mortgage bears interest at 9.915% per annum, requires monthly payments of
principal and interest of $26,000 and matures in April 2001. The $79,000
seller financing bears interest at 9.9% per annum and requires monthly payments
of interest only through maturity in May 1997 at which time the entire
outstanding principal balance and all accrued and unpaid interest is due. The
Trust paid a real estate brokerage commission of $127,000 to Carmel Realty and
an acquisition fee of $36,000 to BCM based on the $3.6 million purchase price
of the property.
In July 1995, the Trust purchased the McCallum Glen Apartments, a 275 unit
apartment complex in Dallas, Texas, for $6.0 million. The Trust paid $1.8
million in cash and obtained new mortgage financing of $4.2 million. The new
first mortgage bears interest at a variable rate, 8.6% per annum at December
31, 1995, requires monthly payments of principal and interest and matures on
August 1, 2002. The Trust paid a real estate brokerage commission of $190,000
to Carmel Realty and an acquisition fee of $60,000 to BCM based on the $6.0
million purchase price.
In November 1995, the Trust purchased the Willow Wick Apartments, a 104 unit
apartment complex in North Augusta, South Carolina, for $1.5 million. The
Trust paid $595,000 in cash and assumed the existing first mortgage of
$930,000. The mortgage bears interest at 7% per annum, requires monthly
payments of principal and interest of $8,000 and matures in January 2013. The
Trust paid a real estate brokerage commission of $61,000 to Carmel Realty and
an acquisition fee of $15,000 to BCM based on the $1.5 million purchase price
of the property.
13
<PAGE> 14
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In December 1995, the Trust purchased the Heritage on the River Apartments, a
301 unit apartment complex in Jacksonville, Florida, for $7.9 million. The
Trust paid $1.4 million in cash and assumed the existing first mortgage of $6.3
million and the seller provided additional financing of $193,000. The
mortgages bear interest at a variable rate, 9.18% per annum at December 31,
1995, require monthly payments of interest only and mature in December 1998.
The Trust paid a real estate brokerage commission of $228,000 to Carmel Realty
and an acquisition fee of $79,000 to BCM based on the $7.9 million purchase
price of the property.
Also in December 1995, the Trust purchased the Brookfield Corporate Center, a
63,504 square foot industrial facility in Chantilly, Virginia, for $3.5 million.
The Trust paid $650,000 in cash and the seller provided mortgage financing of
$2.8 million. The mortgage bears interest at 7.6% per annum, requires monthly
payments of principal and interest of $21,000 and matures in December 1998.
The Trust paid a real estate brokerage commission of $124,000 to Carmel Realty
and an acquisition fee of $35,000 to BCM based on the $3.5 million purchase
price of the property.
In May and December 1995, the Trust refinanced the mortgage debt secured by the
Sunset Lake Apartments in Waukegan, Illinois in the amount of $8.0 million.
The Trust received net cash of $5.3 million after the payoff of $1.9 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
fund repair escrows and to pay various closing costs associated with the
refinancings. The new mortgage bears interest at 7.625% per annum, requires
monthly payments of principal and interest of $60,000 and matures in January
2006. The Trust paid BCM a total of $134,000 in mortgage brokerage and equity
refinancing fees based upon the initial refinancing of $5.4 million and the
second refinancing of $8.0 million.
In August 1995, the Trust obtained mortgage financing secured by the previously
unencumbered Quail Oaks Apartments in Balch Springs, Texas in the amount of
$750,000. The mortgage bears interest at a variable rate, 9.75% at December
31, 1995, requires monthly payments of principal and interest, currently $7,000
and matures in August 2000. The Trust received net cash of $734,000 after the
payment of various closing costs associated with the financing. The Trust paid
BCM a mortgage brokerage and equity refinancing fee of $7,500 based upon the
$750,000 financing.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
14
<PAGE> 15
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Partnership Properties. Set forth below are the properties owned by the
partnerships in which the Trust is an equity investee and the average annual
rental rate and occupancy thereof at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
Units/ ------------------------- --------------------------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento Nine Rancho Cordova, CA 105,249 sq. ft. $10.98 $ 10.70 $ 10.46 100% 100% 100%
Indcon, L.P. Dallas, TX 424,813 sq. ft. 2.43 2.32 2.30 89% 100% 100%
San Antonio, TX 418,317 sq. ft. 2.27 2.06 2.00 100% 96% 100%
Atlanta, GA 1,584,447 sq. ft. 2.04 2.14 1.92 99% 96% 91%
Memphis, TN 655,077 sq. ft. 2.34 2.19 2.04 89% 91% 79%
</TABLE>
The Trust, in partnership with National Income Realty Trust ("NIRT"), owns
Sacramento Nine ("SAC 9") which in turn owns two office buildings. The Trust
has a 30% general partner interest in the partnership. The Trust accounts for
its investment in the partnership using the equity method. Until August 1994,
Bennett B. Sims and Ted P. Stokely, Trustees of the Trust, also served as
Trustees of NIRT. Until March 31, 1994, BCM served as advisor to NIRT. See
ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In August 1995, SAC 9 obtained mortgage financing secured by a previously
unencumbered office building in Rancho Cordova, California in the amount of
$3.5 million. SAC 9 received net cash of $3.4 million after the payment of
various closing costs associated with the financing, of which the Trust's
equity share was $1.0 million. The new mortgage bears interest at a variable
rate, currently 8.59% per annum, requires monthly payments of principal and
interest, currently $31,000, and matures in September 2000.
The Trust and NIRT are also the partners in Income Special Associates ("ISA"),
a joint venture partnership in which the Trust has a 60% partnership interest.
ISA in turn owns a 100% interest in Indcon, L.P. ("Indcon"), formerly known as
Adams Properties Associates. At December 31, 1995, Indcon owned 31 industrial
warehouse facilities. The Indcon partnership agreement requires consent of
both the Trust and NIRT for any material changes in the operations of the
partnership's properties, including sales, refinancings and changes in property
manager. Therefore, the Trust is a noncontrolling partner and accounts for its
investment in Indcon using the equity method. See ITEM 13. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
In February and March 1996, Indcon completed the sale of 25 of its industrial
warehouses for a total of $36.2 million in cash. Indcon received net cash of
$11.1 million, of which the Trust's equity share was $6.7 million, after the
payoff of existing mortgage debt with a principal balance of $23.5 million at
December 31, 1995. Indcon will recognize a gain of approximately $617,000 on
the sale, of which the Trust's equity share will be approximately $370,000.
Indcon paid a real estate sales commission of $585,000 to Carmel Realty based
upon the $36.2 million sales price of the properties.
15
<PAGE> 16
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Properties Held for Sale. Set forth below are the Trust's foreclosed
properties held for sale and a property under contract for sale, and the
monthly rental rate for apartments and the average annual rental rate for
commercial properties and occupancy thereof at December 31, 1995, 1994 and
1993:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
Units/ ------------------------ -----------------------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
Apartments
- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Driftwood Detroit, MI 129 units/
82,200 sq. ft. $ .62 $ * $ * 85% * *
Rivertree Hurst, TX 205 units/
167,522 sq. ft. .47 .47 .46 84% 82% 92%
Shadowridge Rocksprings, WY 64 units/
52,700 sq. ft. .59 .57 .56 92% 95% 100%
Office Building
- ---------------
Pinemont Houston, TX 19,685 sq. ft. 9.82 9.79 9.77 80% 100% 100%
Industrial Facility
- -------------------
Ogden Industrial Ogden, UT 107,112 sq. ft. 2.76 2.64 2.55 100% 100% 97%
Land
- ----
Del Ray Forum Delray Beach, FL 5 acres
Northwest
Crossings Houston, TX 6 acres
Round Mountain Austin, TX 128 acres
</TABLE>
__________________
* Property obtained through foreclosure in 1995.
At December 31, 1995, Rivertree Apartments was under contract for sale. In
February 1996, the Trust completed the sale of the apartment complex for $1.8
million. In conjunction with the sale the Trust provided $750,000 of purchase
money financing in the form of a wraparound mortgage note. The Trust received
net cash of $959,000 after the payment of various closing costs associated with
the sale. The Trust paid a real estate sales commission of $70,000 to Carmel
Realty based on the $1.8 million sales price of the property. The Trust will
recognize a gain of approximately $378,000 on the sale. See "Mortgage Loans"
below.
In March 1995, the Trust recorded the insubstance foreclosure of the Driftwood
Apartments, a 138 unit apartment complex in Detroit, Michigan. Driftwood
Apartments had an estimated fair value (minus estimated costs of sale) at the
date of foreclosure, which exceeded the carrying value of the Trust's note
receivable. Foreclosure of the property was completed on May 2, 1995. The
foreclosure resulted in no loss to the Trust.
The three parcels of unimproved land owned by the Trust were each obtained
through foreclosure. Two were obtained through foreclosure of a mortgage note
secured primarily by office buildings. The third and largest, the Round
Mountain parcel, was intended to be developed in 1983 when the Trust funded the
mortgage loan secured by the land.
16
<PAGE> 17
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
The Trust intends to hold these parcels of unimproved land until the market
conditions in the areas in which the properties are located improve, at which
time the Trust intends to offer the properties for sale. The Declaration of
Trust provides that the Trust may not invest in unimproved real estate or make
mortgage loans secured by unimproved real estate unless the property is being
or is expected to be developed within a reasonable period of time or unless the
unimproved real estate serves as additional security on a permitted type of
mortgage loan.
In 1996, the Trust intends to increase its emphasis on the sale of foreclosed
properties.
Mortgage Loans
In addition to real estate, a substantial portion of the Trust's assets are
invested in mortgage notes receivable, principally those secured by
income-producing real estate. The Trust expects that the percentage of its
assets invested in mortgage loans will decrease, as it has determined that it
will no longer actively seek to fund or acquire mortgage loans. It may,
however, originate mortgage loans in conjunction with providing purchase money
financing of a property sale. The Trust does intend, however, to service and
hold for investment the mortgage notes currently in its portfolio. The Trust's
mortgage notes receivable consist of first mortgage loans and junior mortgage
loans.
Types of Mortgage Activity. In the past, the Trust has originated its own
mortgage loans as well as acquired existing mortgage notes either directly from
builders, developers or property owners, or through mortgage banking firms,
commercial banks or other qualified brokers. The Trust is generally not
considering new mortgage lending, except in connection with purchase money
financing offered to facilitate the sale of Trust properties. BCM, in its
capacity as a mortgage servicer, services the Trust's mortgage notes. The
Trust's investment policy is described in ITEM 1. "BUSINESS - Business Plan and
Investment Policy".
Types of Properties Subject to Mortgages. The properties securing the Trust's
mortgage notes receivable portfolio at December 31, 1995, consisted of office
buildings, apartments and single-family residences. To the extent that the
Declaration of Trust does not control such matters, the Trust's Board of
Trustees may alter the types of properties subject to mortgage loans in which
the Trust invests without a vote of the Trust's shareholders. In addition to
restricting the types of collateral and priority of mortgage loans in which the
Trust may invest, the Declaration of Trust imposes certain restrictions on
transactions with related parties, as discussed in ITEM 13. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".
At December 31, 1995, the Trust's mortgage notes receivable portfolio included
eight mortgage loans with an aggregate outstanding balance of $7.6 million
secured by income-producing real estate located throughout the United States
and seven mortgage loans with an aggregate outstanding
17
<PAGE> 18
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
balance of $654,000 secured by single-family residences also located throughout
the United States. At December 31, 1995, a total of 2% of the Trust's assets
were invested first in mortgage notes.
The following table sets forth the percentages (based on the outstanding
mortgage note balance), by both property type and geographic region, of the
properties that serve as collateral for the Trust's outstanding mortgage notes
receivable portfolio at December 31, 1995. The table does not include the
$654,000 in mortgage notes secured by single- family residences discussed in
the preceding paragraph or the $1.6 million first mortgage secured by a ranch
located in Southwest region. See Schedule IV to the Consolidated Financial
Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
for further details of the Trust's mortgage notes receivable portfolio.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Total
------------ ---------- ---------- -------
<S> <C> <C> <C>
Southeast.................... 12.5% 52.2% 64.7%
Southwest.................... 22.1 7.3 29.4
Midwest...................... 5.9 - 5.9
---- ---- ----
40.5% 59.5% 100.0%
</TABLE>
A summary of the activity in the Trust's mortgage notes receivable portfolio
during 1995 is as follows:
<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio
at January 1, 1995..................................... 17
Loan paid in full....................................... (1)
Loan foreclosed by the Trust............................ (1)
---
Loans in mortgage notes receivable portfolio
at December 31, 1995................................... 15
===
</TABLE>
First Mortgage Loans. The Trust has invested in first mortgage notes, with
either short, medium or long-term maturities. First mortgage loans generally
provide for level periodic payments of principal and interest sufficient to
substantially repay the loan prior to maturity, but may involve interest-only
payments or moderate amortization of principal and a "balloon" principal
payment at maturity. With respect to first mortgage loans, it was the Trust's
general policy to require that the borrower provide a mortgagee's title policy
or an acceptable legal title opinion as to the validity and the priority of the
mortgage lien over all other obligations, except liens arising from unpaid
property taxes and other exceptions normally allowed by first mortgage lenders
in the relevant area. The Trust may grant to other lenders participations in
first mortgage loans originated by the Trust.
The following discussion briefly describes the events that affected previously
funded first mortgage loans, during 1995.
At December 31, 1994, the $1.5 million first mortgage note receivable secured
by the Alderwood Apartments in Detroit, Michigan was in default. In May 1995,
the Trust accepted $1.0 million in cash in full satisfac-
18
<PAGE> 19
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
tion of the debt. A provision for loss of $541,000 was recognized in 1995 to
provide for the loss on the discounted payoff of the mortgage note receivable.
Also at December 31, 1994, the first mortgage note secured by the Driftwood
Apartments, with a principal balance at that date of $891,000 was in default.
In March 1995, the Trust recorded the insubstance foreclosure of the collateral
property securing the mortgage note receivable. See "Real Estate," above.
At December 31, 1995, two of the Trust's first mortgage notes receivable with
principal balances totaling $2.1 million were in default. One of the notes,
with a principal balance of $1.4 million matured in November 1995. The
borrower is currently negotiating with the Trust for an extension of the note
in return for a principal paydown and payment of all accrued interest, which
totaled $198,000 at December 31, 1995. 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 other note, with a principal
balance of $700,000, matured in July 1993. The Trust continues to receive
partial interest payments monthly on the note. The Trust is evaluating its
options with respect to foreclosure of the collateral property and does not
anticipate incurring a loss on this note in excess of previously established
reserves.
Wraparound Mortgage Loans. The Trust has invested in wraparound mortgage
loans, sometimes called all-inclusive loans, made on real estate subject to
prior mortgage indebtedness. A wraparound mortgage loan is a mortgage loan
having an original principal amount equal to the outstanding balance under the
prior existing mortgage loan(s) plus the amount actually advanced under the
wraparound mortgage loan.
Wraparound mortgage loans may provide for full, partial or no amortization of
principal. The Trust's policy was to make wraparound mortgage loans in amounts
and on properties as to which it would otherwise make first mortgage loans. At
December 31, 1995, the Trust's mortgage notes receivable portfolio contained no
wraparound mortgage loans.
In February 1996, the Trust sold the Rivertree Apartments and provided $750,000
in purchase money financing in the form of a wraparound mortgage note. The
wraparound mortgage note bears interest at 9% per annum, requires monthly
payments of interest only and matures in November 1996. See "Real Estate,"
above.
Junior Mortgage Loans. The Trust has invested in junior mortgage loans. Such
loans are secured by mortgages that are subordinate to one or more prior liens
either on the fee or a leasehold interest in real estate. Recourse on such
loans ordinarily includes the real estate on which the loan is made, other
collateral and personal guarantees by the borrower. The Trust's Declaration of
Trust restricts investment in junior mortgage
19
<PAGE> 20
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
loans, excluding wraparound mortgage loans, to not more than 10% of the Trust's
assets. At December 31, 1995, none of the Trust's assets were invested in
junior mortgage loans.
The Trust did not originate or acquire any junior mortgage loans during 1995.
The following discussion briefly describes the events that affected previously
funded junior mortgage loans during 1995 and a junior mortgage loan originated
by the Trust in 1996.
In September 1991, the Trust funded a $2.0 million junior mortgage loan,
secured by the Aspen Village Townhomes, located in Hartland, Wisconsin. On
March 27, 1992, the Trust funded an additional $150,000 junior mortgage loan,
also secured by the Aspen Village Townhomes. The notes had an extended
maturity date of April 27, 1992 and September 23, 1992, respectively. The
underlying first lienholder has notified the Trust that it has commenced
foreclosure proceedings. In December 1995, the Trust wrote off the mortgage
notes as uncollectible. No loss was incurred beyond the reserves previously
provided.
In February 1996, the Trust funded a $1.5 million second lien mortgage secured
by the Signature Athletic Club Building in Dallas, Texas. The note bears
interest at 12% per annum and requires monthly interest only payments to the
extent of available cash flow. Any accrued but unpaid interest is added to the
principal balance of the note annually. In addition, the note requires
quarterly principal payments equal to the excess property cash flow for the
quarter. The note matures in October 1998 with an option to extend the note to
December 2000. The Trust has also guaranteed the underlying $3.0 million first
mortgage secured by the property. The Trust has an option to purchase a 50%
interest in the partnership which owns the Signature Athletic Club Building for
$100 at any time. The option expires in December 2005.
Equity Investments in Real Estate Entities
In September 1990, the Trust's Board of Trustees authorized the purchase of up
to $2.0 million of the common stock of ART through negotiated or open market
transactions. The officers of the Trust also serve as officers of ART and BCM.
BCM, the Trust's advisor, also serves as advisor to ART. At March 15, 1996,
ART owned approximately [38]% of the Trust's outstanding shares of beneficial
interest. At December 31, 1995, the Trust owned 409,044 shares of ART's common
stock, approximately 7% of ART's outstanding shares of common stock, which the
Trust had purchased in open market transactions in 1990 and 1991, at a total
cost to the Trust of $1.6 million. The ART common stock owned by the Trust is
considered to be available for sale and accordingly, is carried at fair value
defined as the period end closing market value. At December 31, 1995, the
market value of the ART common stock was $3.0 million. See ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA."
In December 1990, the Trust's Board of Trustees authorized the purchase of up
to $1.0 million of the shares of beneficial interest of National Income Realty
Trust ("NIRT"), a REIT that until March 31, 1994, was also
20
<PAGE> 21
ITEM 2. PROPERTIES (Continued)
Equity Investments in Real Estate Entities (Continued)
advised by BCM, and up to $1.0 million of the shares of common stock of TCI
through negotiated or open market transactions. The Trustees of the Trust
serve as directors of TCI and the officers of the Trust also serve as officers
of TCI. BCM, the Trust's advisor, also serves as advisor to TCI. At December
31, 1995, the Trust owned 84,580 shares of beneficial interest of NIRT acquired
at a total cost to the Trust of $415,000 and 79,500 shares of common stock of
TCI acquired at a total cost to the Trust of $235,000 all of which shares the
Trust had purchased in open market transactions in 1990 and 1991. The Trust's
investment in these entities is also considered as available for sale and is
also carried at fair value. At December 31, 1995, the market value of the
Trust's investment in NIRT and TCI shares was $941,000 and $795,000,
respectively.
Under the original terms of its Declaration of Trust, the Trust was prohibited
from investing in equity securities for a period in excess of 18 months.
However, pursuant to an amendment to the Trust's Declaration of Trust approved
by the Trust's shareholders in May 1992, the Trust may hold these shares of
ART, NIRT and TCI until July 30, 1996. At the Annual Meeting of Shareholders
to be held in April 1996, shareholder's of the Trust will be ask to repeal that
section of the Trust's Declaration of Trust which limits the holding period for
equity securities.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
In February 1990, the Trust, together with IORI, NIRT and TCI, three real
estate entities with, at the time, the same officers, directors or trustees and
advisor as the Trust, entered into a settlement of a class and derivative
action entitled Olive et al. v. National Income Realty Trust et al., in the
United State District Court for the Northern District of California, relating
to the operation and management of each of such entities. On April 23, 1990,
the court granted final approval of the terms of the settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the court on July 1, 1994. Final court approval of
the Modification was entered on December 12, 1994. The effective date of the
Modification was January 11, 1995.
The Modification, among other things, provided for the addition of three new
unaffiliated members to the Trust's Board of Trustees and set forth new
requirements for the approval of any transactions with affiliates until April
28, 1999. In addition, BCM, the Trust's advisor, Gene E. Phillips and William
S. Friedman, who served as President and Trustee of the Trust until February
24, 1994, President of BCM until May 1, 1993
21
<PAGE> 22
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
and director of BCM until December 22, 1989, agreed to pay a total of $1.2
million to the Trust, IORI, NIRT and TCI, of which the Trust's share is
$750,000. As of March 1, 1996, the Trust had received payments totaling
$594,000. The remaining $156,000 is being paid in monthly installments through
August 1, 1996.
Under the Modification, the Trust, IORI, NIRT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, IORI, NIRT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current members of the
Trust's Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Trust's Board of Trustees appointed pursuant to the
terms of the Modification that stand for reelection during the three calendar
years following the effective date of the Modification.
Pursuant to the terms of the Modification, certain related party transactions
which the Trust may enter into prior to April 28, 1999, require the unanimous
approval of the Trust's Board of Trustees. In addition, such related party
transactions are to be discouraged and 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 IORI, 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, (including the Advisory Agreement, the Brokerage
Agreement and the property management contracts). 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 IORI, NIRT or TCI or any of their affiliates or subsidiaries and
a third party having no prior or intended future business or
22
<PAGE> 23
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
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, IORI, NIRT and TCI maintain a Related
Party Transaction Committee and a Litigation Committee of their respective
Boards. The court retains jurisdiction to enforce the Modification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
________________________
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, 1996
(through March 15, 1996)............. $ 10 1/2 $ 9 5/8
March 31, 1995........................ 10 3/16* 10 *
June 30, 1995......................... 10 11/16* 9 11/16*
September 30, 1995.................... 10 5/16* 9 11/16*
December 31, 1995..................... 10 1/2* 9 11/16*
March 31, 1994........................ 9 11/16* 8 5/16*
June 30, 1994......................... 9 11/16* 9 5/16*
September 30, 1994.................... 9 13/16* 9 5/16*
December 31, 1994..................... 10 * 9 5/16*
</TABLE>
_______________________
* Restated for the three for two forward share split effected February 15,
1996.
As of March 15, 1996, the closing price of the Trust's shares of beneficial
interest on the Nasdaq was $9.63 per share.
As of March 15, 1996, the Trust's shares of beneficial interest were held by
6,884 holders of record.
23
<PAGE> 24
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS (Continued)
The Trust paid distributions in 1995 and 1994 as follows:
<TABLE>
<CAPTION>
Date Declared Record Date Payable Date Amount*
- ---------------- ----------------- ----------------- -------
<S> <C> <C> <C>
March 3, 1995 March 15, 1995 March 31, 1995 $ .10
May 22, 1995 June 15, 1995 June 30, 1995 .10
August 25, 1995 September 15, 1995 September 30, 1995 .10
November 30, 1995 December 15, 1995 December 31, 1995 .10
February 15, 1994 March 1, 1994 March 21,1994 $ .10
May 6, 1994 June 1, 1994 June 15, 1994 .10
August 24, 1994 September 15, 1994 September 30, 1994 .10
December 1, 1994 December 15, 1994 December 30, 1994 .10
</TABLE>
________________
* Restated for the three for two forward share split effected February 15, 1996.
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1995 and 1994 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 1,465,000 of its
shares of beneficial interest pursuant to such program. Through December 31,
1995, the Trust had repurchased 1,177,725 of its shares at a total cost to the
Trust of $5.0 million. The Trust purchased none of its shares of beneficial
interest during 1995. In 1996, through March 15, 1996, the Trust has
repurchased 128,994 additional shares at a total cost to the Trust of $1.3
million.
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
limitation on the percentage 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
24
<PAGE> 25
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS (Continued)
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
15, 1996, Mr. Phillips and his affiliates, primarily ART and BCM, owned
approximately [51]% of the Trust's outstanding shares of beneficial interest.
The increase in ownership above 49% is the result of the Trust repurchasing its
shares in 1996.
On March 21, 1996, the Trust's Board of Trustees reconsidered the share
ownership limitation and determined that there was no reason to object to the
purchase by Mr. Phillips and his affiliates of additional shares in excess of
49% of the Trust's outstanding shares. Accordingly, there is no longer any
limitation on the percentage of shares of the Trust which may be acquired by
Mr. Phillips and his affiliates.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- -------- ---------- ---------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Income....................... $ 38,539 $ 29,262 $ 23,710 $ 20,818 $ 15,035
Expense...................... 39,982 31,803 23,460 20,443 15,812
-------- -------- --------- ---------- ---------
Income (loss) before
gain on sale of
real estate and
extraordinary gain.......... (1,443) (2,541) 250 375 (777)
Gain on sale of
real estate................. - 1,708 365 383 234
Extraordinary gain........... - - - - 930
-------- -------- ---------- ---------- ---------
Net income (loss)............ $ (1,443) $ (833) $ 615 $ 758 $ 387
======== ======== ========== ========== =========
EARNINGS PER SHARE DATA
Income (loss) before
extraordinary gain.......... $ (.33) $ (.19) $ .13 $ .15 $ (.10)
Extraordinary gain........... - - - - .17
-------- --------- --------- --------- ---------
Net income (loss)............ $ (.33) $ (.19) $ .13 $ .15 $ .07
======== ========= ========= ========= =========
Distributions per share...... $ .40 $ .40 $ .33 $ - $ .71
Weighted average
shares outstanding.......... 4,377,165 4,379,722 4,521,384 5,058,762 5,308,398
</TABLE>
25
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable.................. $ 5,351 $ 7,117 $ 32,129 $ 34,590 $ 41,748
Real estate held for sale
Foreclosed.................. 6,436 19,533 10,486 9,669 24,571
Other....................... 1,268 - - - -
Real estate held for
investment.................. 174,713 124,706 94,440 78,170 49,638
Investment in
partnerships................ 12,970 13,805 14,079 14,537 20,148
Total assets................. 218,568 182,839 160,462 143,925 140,950
Notes and interest
payable..................... 135,590 98,252 74,786 58,834 54,226
Shareholders' equity......... 75,985 78,767 81,139 81,985 83,290
Book value per share......... $ 17.36 $ 17.99 $ 18.53 $ 17.13 $ 15.94
</TABLE>
The Trust purchased seven properties in 1995 for a total of $38.9 million,
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."
Shares and per share data have been restated for the three for two forward
share split effected February 15, 1996.
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 totaled $6.4 million at December 31, 1995 compared
with $7.5 million at December 31, 1994. The principal reasons for this
decrease 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 1996, 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.
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Trust's cash flow from property operations (rents collected less payments
for property operating expenses) has continually increased over the past three
years from $8.4 million in 1993 to $10.7 million in 1994 to $15.1 million in
1995. Of this $6.7 million net increase from 1993 to 1995, $6.1 million is
the result of the Trust having acquired additional income producing properties,
both through purchase and foreclosure, and the remainder of $600,000 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 $2.4 million in 1993 to $2.2 million in 1994 to $688,000 in 1995.
These decreases are primarily attributable to the foreclosure of the collateral
property securing mortgage notes receivable and the payoff of mortgage notes
receivable in 1994 and 1995.
Interest will continue to decrease as a source of cash to the Trust as the
Trust has determined that generally, it will not seek to originate new mortgage
loans, other than those resulting from Trust provided purchase money financing
in connection with a property sale.
Interest paid on the Trust's notes payable increased from $6.6 million in 1994
to $8.9 million in 1995. This increase is primarily attributable to interest
paid on mortgages secured by properties acquired in 1994 and 1995, and interest
paid on borrowings in 1995 and 1994 secured by mortgages on previously
unencumbered properties. The Trust believes that interest paid on notes
payable will continue to increase in 1996 if the Trust continues to acquire
additional properties and/or obtain financing on unencumbered properties.
The Trust was involved in significant investing activities during 1995. The
Trust purchased four apartment complexes and three commercial properties during
1995, for which the Trust paid a total of $40.8 million. The Trust paid $9.8
million in cash, with the remaining $31.0 million financed through new or
assumed mortgage debt. The Trust also made improvements to its properties
totaling $1.2 million. In addition, the Trust collected $1.1 million on its
mortgage notes receivable, primarily from the payoff of one note of $1.0
million, with the remainder being collected from scheduled paydowns on the
Trust's other mortgage notes receivable.
During 1995, the Trust received net financing proceeds of $734,000 from
mortgage financing secured by a previously unencumbered apartment complex. In
addition, the Trust refinanced the mortgage secured by another apartment
complex. The Trust received a total of $11.8 million in net cash proceeds
after the payoff of $6.3 million in existing mortgage debt and the payment of
various closing costs associated with the financings. Also during 1995, the
Trust made scheduled principal payments on mortgages totaling $1.3 million.
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In January 1993, the Trust's Board of Trustees approved the resumption of
quarterly distributions. In 1995 and 1994, the Trust paid distributions to
shareholders of $.40 per share or a total of $1.8 million in each year.
During the first quarter of 1996, the Trust has continued to be an active
investor. The Trust has purchased one office building, for $7.7 million, the
Trust paying $1.1 million in cash with the remainder of the purchase price
financed through mortgage debt. In connection with the financing the Trust
also established various escrow accounts in the amount of $1.5 million. In
February 1996, the Trust funded a $1.5 million junior mortgage secured by a
building occupied by an athletic club. The Trust derived the cash portions of
these investments from its cash on hand at December 31, 1995. See NOTE 17.
"SUBSEQUENT EVENTS."
Pursuant to a repurchase program originally announced by the Trust on December
5, 1989, the Trust's Board of Trustees have authorized the Trust to repurchase
a total of 1,465,000 of its shares of beneficial interest. Through December
31, 1995, the Trust had repurchased 1,177,725 of its shares at a total cost to
the Trust of $5.0 million. During 1995, the Trust did not repurchase any of
its shares. In 1996, through March 15, 1996, the Trust has repurchased
128,994 additional shares at a total cost to the Trust of $1.3 million and at
such date, 158,281 shares remain to be repurchased.
On a quarterly basis, the Trust's management reviews the carrying value of the
Trust's mortgage notes receivable, properties held for investment and
properties held for sale. Generally accepted accounting principles require
that the carrying value of an investment cannot exceed the lower of its cost or
its estimated net realizable value. In those instances in which estimates of
net realizable value of the Trust's properties or notes are less than the
carrying value thereof at the time of evaluation, a provision for loss is
recorded by a charge against earnings. Estimated net realizable value of
mortgage notes receivable is based on the Trust's management's review and
evaluation of the 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
1995 compared to 1994. For the year 1995, the Trust had a net loss of $1.4
million, as compared to a net loss of $833,000 for the year 1994. The primary
factors contributing to the increase in the Trust's net loss are discussed in
the following paragraphs.
Net rental income (rents less expenses applicable to rents) increased from
$10.2 million in 1994 to $14.9 million in 1995. Of this increase,
28
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
$1.8 million is due to the acquisition of four apartment complexes and three
commercial properties in 1995, $1.7 million is due to the acquisition of seven
apartment complexes and one commercial property in 1994, which did not
contribute to net rental income for the full year in 1994, and $804,000 of the
increase is attributable to two apartment complexes obtained through
foreclosure in 1994. An additional increase of $640,000 is attributable to
generally higher rents and occupancy at the Trust's apartment complexes. These
increases are offset in part by a $244,000 decrease in net rental income at one
of the Trust's commercial properties and one 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 1996, primarily from a full year of operations from the four
apartment complexes and three commercial properties acquired in 1995 and from
the anticipated purchase of additional real estate in 1996.
Interest income decreased from $2.7 million in 1994 to $723,000 in 1995. Of
this decrease, $1.7 million is attributable to a $14.0 million wraparound
mortgage note receivable which was paid in full in December 1994 and $99,000 is
attributable to the discounted payoff of a $1.5 million first mortgage note
receivable in May 1995. An additional $486,000 is due to the foreclosure of
two properties during 1994 and one property during 1995 which secured three of
the Trust's other mortgage notes receivable. These decreases are partially
offset by an increase of $299,000 attributable to a $1.4 million first mortgage
note receivable which was received in December 1994 in connection with the
payoff of the $14.0 million mortgage note receivable discussed above. Interest
income is expected to continue at the current level in 1996, as the Trust is
generally not considering new mortgage lending except in connection with
purchase money financing of sales of the Trust's properties.
The Trust's equity in partnerships improved from a loss of $479,000 in 1994 to
income of $230,000 in 1995. This improvement is primarily due to higher rents
and occupancy at the 31 industrial warehouse facilities owned by Indcon, L.P.
("Indcon"), a joint venture partnership. This improvement is partially offset
by an increase in losses in Sacramento Nine ("SAC 9"), a joint venture
partnership due to increased interest expense, as a result of new mortgage
financing secured by a previously unencumbered office building. In February
and March 1996, Indcon completed the sale of 25 of its 31 industrial warehouse
facilities. See NOTE 6. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS."
Interest expense increased from $7.7 million in 1994 to $10.0 million in 1995.
Of this increase, $2.4 million is due to interest expense recognized on
mortgages secured by properties acquired in 1994 and 1995. An additional
$766,000 is due to interest expense on six borrowings in 1994 and 1995, secured
by mortgages on previously unencumbered apartment complexes and refinancing of
existing mortgages. These increases are
29
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
partially offset by a decrease of $855,000 due to the payoff of the underlying
lien related to the payoff of a $14.0 million wraparound mortgage note
receivable in December 1994.
Depreciation expense increased from $3.2 million in 1994 to $4.3 million in
1995. This increase is due to the acquisition of four apartment complexes and
three commercial properties in 1995 and seven apartment complexes and one
commercial property in 1994.
A provision for losses of $541,000 was recorded in 1995 to provide for the loss
on the discounted payoff of the mortgage note receivable secured by Alderwood
Apartments. A provision for losses of $1.2 million was recorded in 1994 to
write down the Genessee Towers, an office building, to the amount of the
nonrecourse mortgage debt. In addition, a provision for losses of $200,000 was
recorded in 1994 to provide for the loss on the sale of Oak Forest Apartments,
one of the Trust's foreclosed properties held for sale. See NOTE 4. "REAL
ESTATE AND DEPRECIATION."
Advisory fee to affiliate was comparable at $1.3 million in 1995 and 1994.
General and administrative expenses were comparable at $1.2 million in 1995 and
1994. A decrease in legal fees was offset by expenses incurred in connection
with the Trust's annual meeting.
For the year 1994, the Trust recognized a gain on the sale of real estate of
$577,000 related to the sale of an industrial warehouse facility by Indcon. In
addition, the Trust recognized a gain of $1.1 million on the settlement of a
profit participation related to the December 1994 payoff of one of the Trust's
wraparound mortgage note receivable. See NOTE 2. "NOTES AND INTEREST
RECEIVABLE."
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 (rents income less expenses applicable to rents) 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
30
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
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.
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.
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 industrial warehouse facilities owned by Indcon, a
joint venture partnership.
Interest expense increased from $5.5 million in 1993 to $7.7 million in 1994.
Of this increase, $1.5 million is due to interest expense recorded on mortgages
secured by properties acquired in 1993 and 1994. An additional $597,000 is due
to interest expense on a borrowing in September 1993 and four borrowings in
1994, all secured by mortgages on previously unencumbered apartment complexes.
Depreciation expense increased from $2.4 million in 1993 to $3.2 million in
1994. This increase is due to the acquisition of seven apartment complexes and
one commercial property in 1994 and four apartment complexes and one commercial
property in 1993.
A provision for losses of $1.2 million was recorded in 1994 to write down the
Genessee Towers, an office building, to the amount of the nonrecourse mortgage
debt. In addition, a provision for losses of $200,000 was recorded in 1994 to
provide for the loss on the sale of Oak Forest Apartments, one of the Trust's
foreclosed properties held for sale. (See NOTE 4. "REAL ESTATE AND
DEPRECIATION.") A provision for loss of $221,000 was recorded in 1993 to
provide for the loss on the sale of English Hills Apartments, also a foreclosed
property held for sale.
Advisory fee to affiliate increased from $1.2 million in 1993 to $1.3 million
in 1994. This increase is due to an increase in the Trust's gross assets, the
basis for the advisory fee, as a result of the Trust's acquisition of eight
properties in 1994 and five properties in 1993.
31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
General and administrative expenses decreased from $1.3 million in 1993 to $1.2
million in 1994. A decrease in legal fees and expenses incurred in connection
with the Trust's annual meeting were offset in part by an increase in cost
reimbursements to the Trust's advisor.
For the year 1994, the Trust recognized a gain on the sale of real estate of
$577,000 related to the sale of an industrial warehouse facility by Indcon, a
joint venture partnership. In addition, the Trust recognized a gain of $1.1
million on the settlement of a profit participation related to the 1994 payoff
of one of the Trust's notes receivable. For the year 1993, the Trust
recognized gains on sale of real estate of $365,000 related to the sale of
three properties by SAC 9, a joint venture partnership.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Trust for personal injury
associated with such materials.
The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets or results of operations.
Inflation
The effects of inflation on the Trust's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with increases and
decreases in housing costs. Fluctuations in the rate of inflation also affect
the sales values of properties and, correspondingly, the ultimate gains to be
realized by the Trust from property sales. Inflation also has an effect on
the Trust's earnings from short-term investments.
Tax Matters
For the years ended December 31, 1995, 1994 and 1993, the Trust elected and in
the opinion of the Trust's management, qualified to be treated as a REIT as
defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"). To continue to qualify for federal taxation as a REIT
under the Code, the Trust is required to hold at least 75% of the value of its
total assets in real estate assets, government securities, cash and cash
equivalents at the close of each quarter of each
32
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Tax Matters (Continued)
taxable year. The Code also requires a REIT to distribute at least 95% of its
REIT taxable income plus 95% of its net income from foreclosure property, as
defined in Section 857 of the Code, on an annual basis to shareholders.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified or held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not to be depreciated. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995.
The Trust's management estimates that if the Trust had adopted SFAS No. 121
effective January 1, 1995, the Trust's depreciation for 1995 would have been
reduced by $229,000, its net loss would have been reduced by a like amount and
a provision for loss for either impairment of its properties held for
investment or for a decline in estimated fair value less cost to sell of its
properties held for sale would not have been required. The Trust adopted SFAS
No. 121 effective January 1, 1996.
33
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Continental Mortgage and Equity Trust Page
- ------------------------------------- ----
<S> <C>
Report of Independent Certified Public Accountants.................. 35
Consolidated Balance Sheets -
December 31, 1995 and 1994................................. 36
Consolidated Statements of Operations -
Years Ended December 31, 1995, 1994 and 1993............... 37
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1995, 1994 and 1993............... 38
Consolidated Statements of Cash Flows -
Years Ended December 31, 1995, 1994 and 1993............... 39
Notes to Consolidated Financial Statements.......................... 42
Schedule III - Real Estate and Accumulated Depreciation............. 60
Schedule IV - Mortgage Loans on Real Estate........................ 64
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Financial Statements
or the notes thereto.
34
<PAGE> 35
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees of
Continental Mortgage and Equity Trust
We have audited the accompanying consolidated balance sheets of Continental
Mortgage and Equity Trust and Subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
We have also audited the schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedules.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Continental Mortgage and Equity Trust and Subsidiaries as of December 31, 1995
and 1994, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Dallas, Texas
March 21, 1996
35
<PAGE> 36
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1994
-------------- --------------
Assets (dollars in thousands)
------
<S> <C> <C>
Notes and interest receivable
Performing......................................... $ 4,240 $ 4,269
Nonperforming, nonaccruing......................... 2,299 6,946
-------------- --------------
6,539 11,215
Less - allowance for estimated losses............... (1,188) (4,098)
-------------- --------------
5,351 7,117
Foreclosed real estate held for sale, net of
accumulated depreciation ($738 in 1995 and
$1,409 in 1994).................................... 11,553 24,658
Real estate under contract for sale net of
accumulated depreciation ($602 in 1995)............ 1,268 -
Less - allowance for estimated losses............... (5,117) (5,125)
-------------- --------------
7,704 19,533
Real estate held for investment, net of
accumulated depreciation ($16,395 in 1995 and
$12,050 in 1994)................................... 174,713 124,706
Investment in marketable equity securities,
at market (including $3,812 in 1995 and
$3,447 in 1994 of affiliates)...................... 4,753 4,341
Investment in partnerships.......................... 12,970 13,805
Cash and cash equivalents........................... 6,386 7,478
Other assets (including $469 in 1995 and $604
in 1994 from affiliates)........................... 6,691 5,859
-------------- --------------
$ 218,568 $ 182,839
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes and interest payable.......................... $ 135,590 $ 98,252
Other liabilities (including $923 in 1995 and
$437 in 1994 to affiliates)........................ 6,993 5,820
-------------- --------------
142,583 104,072
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value;
authorized shares, unlimited; issued and
outstanding, 4,377,141 shares in 1995 and
4,377,199 shares in 1994........................... 8,766 8,766
Paid-in capital..................................... 260,060 260,060
Accumulated distributions in excess of
accumulated earnings............................... (195,870) (192,676)
Net unrealized gains on marketable equity
securities......................................... 3,029 2,617
-------------- --------------
75,985 78,767
-------------- --------------
$ 218,568 $ 182,839
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
36
<PAGE> 37
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1995 1994 1993
---------- --------- ----------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Rents.............................. $ 37,586 $ 27,042 $ 20,996
Interest (including $20 in 1993
from affiliates)................. 723 2,699 3,292
Equity in income (losses) of
partnerships..................... 230 (479) (578)
---------- --------- ----------
38,539 29,262 23,710
Expenses
Property operations (including
$806 in 1995, $570 in 1994 and
$296 in 1993 to affiliates)...... 22,682 16,888 12,791
Interest........................... 10,009 7,711 5,531
Depreciation....................... 4,279 3,214 2,431
Provision for losses............... 541 1,429 221
Advisory fee to affiliate.......... 1,264 1,326 1,160
General and administrative
(including $506 in 1995, $524
in 1994 and $453 in 1993 to
affiliate)....................... 1,207 1,235 1,326
---------- --------- ----------
39,982 31,803 23,460
---------- --------- ----------
Income (loss) before gain on sale of
real estate........................ (1,443) (2,541) 250
Gain on sale of real estate.......... - 1,708 365
---------- --------- ----------
Net income (loss).................... $ (1,443) $ (833) $ 615
========== ========= ==========
Earnings per share
Net income (loss).................... $ (.33) $ (.19) $ .13
========= ========= =========
Weighted average shares of
beneficial interest used in
computing earnings per share....... 4,377,165 4,379,722 4,521,384
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
37
<PAGE> 38
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Unrealized
Shares of Distributions Gains on
Beneficial Interest in Excess of Marketable
-------------------------- Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
--------- ---------- ---------- ------------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993...... 4,787,289 9,586 261,601 (189,202) - 81,985
Repurchase of shares of
beneficial interest...... (401,006) (802) (1,475) - - (2,277)
Distributions ($.34 per
share)................... - - - (1,504) - (1,504)
Unrealized gains on market-
able equity securities... - - - - 2,363 2,363
Net income.................... - - - 615 - 615
--------- -------- ----------- ----------- --------- ----------
Balance, December 31, 1993.... 4,386,283 8,784 260,126 (190,091) 2,363 81,182
Repurchase of shares of
beneficial interest...... (9,084) (18) (66) - - (84)
Distributions ($.40 per
share)................... - - - (1,752) - (1,752)
Unrealized gains on market-
able equity securities... - - - - 254 254
Net (loss).................... - - - (833) - (833)
--------- -------- ----------- ----------- --------- ----------
Balance, December 31, 1994.... 4,377,199 8,766 260,060 (192,676) 2,617 78,767
Fractional shares of
beneficial interest
acquired................. (58) - - - - -
Distributions ($.40 per
share)................... - - - (1,751) - (1,751)
Unrealized gains on market-
able equity securities... - - - - 412 412
Net (loss).................... - - - (1,443) - (1,443)
--------- -------- ----------- ----------- --------- ----------
Balance, December 31, 1995.... 4,377,141 $ 8,766 $ 260,060 $ (195,870) $ 3,029 75,985
========= ======== =========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
38
<PAGE> 39
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1995 1994 1993
---------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rents collected.......................... $ 37,610 $ 27,155 $ 20,926
Interest collected (including
$20 in 1993 from affiliates).......... 688 2,171 2,413
Interest paid............................ (8,937) (6,559) (4,523)
Payments for property operations
(including $767 in 1995, $570 in
1994 and $296 in 1993 to
affiliates)........................... (22,520) (16,425) (12,524)
General and administrative expenses
paid (including $506 in 1995,
$524 in 1994 and $453 in 1993 to
affiliates)........................... (1,352) (1,327) (1,331)
Advisory fee paid to affiliate........... (1,514) (1,305) (1,110)
Distributions from partnerships'
operating cash flow................... 41 191 -
Other.................................... 524 (888) 227
--------- ---------- ----------
Net cash provided by operating
activities..................... 4,540 3,013 4,078
Cash Flows from Investing Activities
Acquisitions of real estate
(including $1,723 in 1995, $1,396
in 1994 and $666 in 1993 to
affiliates)........................... (9,766) (9,896) (4,018)
Collections on notes receivable
(including $386 in 1993 from
affiliates)........................... 1,081 5,585 1,743
Fundings of notes receivable............. - (283) (52)
Proceeds from sale of real estate........ 33 2,166 177
Real estate improvements................. (1,170) (729) (1,036)
Distributions from partnerships'
investing cash flow................... - 1,275 748
Contributions to partnerships............ - - (503)
--------- ---------- ----------
Net cash (used in)
investing activities........... (9,822) (1,882) (2,941)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
39
<PAGE> 40
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1995 1994 1993
---------- ----------- ------------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from notes payable............. $ 12,506 $ 10,078 $ 2,389
Payments on notes payable............... (7,590) (3,666) (808)
Proceeds from margin borrowings......... - - 500
Distributions to shareholders........... (1,751) (1,752) (1,504)
Repurchase of shares of beneficial
interest............................. - (84) (2,320)
Distribution from partnership's
financing cash flows................. 1,025 - -
------------- ------------ ------------
Net cash provided by (used in)
financing activities............ 4,190 4,576 (1,743)
------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents........................ (1,092) 5,707 (606)
Cash and cash equivalents, beginning
of year................................. 7,478 1,771 2,377
------------- ------------ ------------
Cash and cash equivalents, end of
year.................................... $ 6,386 $ 7,478 $ 1,771
============= ============ ============
Reconciliation of net income (loss) to
net cash provided by operating
activities
Net income (loss).................... $ (1,443) $ (833) $ 615
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities
Gain on sale of real estate.......... - (1,708) (365)
Depreciation and amortization........ 4,240 3,307 2,663
Equity in (income) loss of
partnerships...................... (230) 479 578
Provision for losses................. 541 1,429 221
(Increase) decrease in interest
receivable........................ (1) 309 (219)
(Increase) decrease in other
assets............................ 432 (785) 98
Increase (decrease) in other
liabilities....................... 204 468 407
Increase in interest payable......... 756 156 80
Distributions from partnerships'
operating cash flow............... 41 191 -
------------- ------------ ------------
Net cash provided by
operating activities............ $ 4,540 $ 3,013 $ 4,078
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
40
<PAGE> 41
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------
1995 1994 1993
---------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Schedule of noncash investing activities
Carrying value of real estate obtained
in satisfaction of notes receivable
(with carrying values totaling
$891 in 1995, $10,095 in 1994
and $1,939 in 1993)..................... $ 891 $11,242 $ 1,939
Mortgage notes receivable from real
estate sales............................ - 365 638
Notes payable from acquisition of
real estate............................. 31,022 23,631 13,441
Prior existing loan assumed by
borrower................................ - 9,000 491
Permanent write down of real estate
held for investment..................... - 1,229 -
Interest on wraparound mortgage note
receivable paid directly to
underlying lienholder................... - 855 855
Unrealized gains on marketable equity
securities.............................. 412 254 2,363
Mortgage note receivable from
settlement of profit participation...... - 1,414 -
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
41
<PAGE> 42
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Continental Mortgage and
Equity Trust and consolidated entities (the "Trust") have been prepared in
conformity with generally accepted accounting principles, the most significant
of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES".
These, along with the remainder of the Notes to the Consolidated Financial
Statements, are an integral part of the Consolidated Financial Statements. The
data presented in the Notes to Consolidated Financial Statements are as of
December 31 of each year and for the year then ended, unless otherwise
indicated. Dollar amounts in tables are in thousands, except per share
amounts.
Shares and per share data have been restated for the three for two forward
share split effected February 15, 1996.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. Continental Mortgage and Equity Trust
("CMET") is a California business trust organized on August 27, 1980. The
Trust may invest in real estate through direct ownership, leases and
partnerships and it may also invest in mortgage loans on real estate, including
first, wraparound and junior mortgage loans.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of CMET and partnerships and subsidiaries which it controls. All
intercompany transactions and balances have been eliminated.
Accounting estimates. In the preparation of the Trust's Consolidated Financial
Statements in conformity with generally accepted accounting principles it was
necessary for the Trust's management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of revenues and expenses for the year then
ended. Actual results could differ from these estimates.
Interest recognition on notes receivable. It is the Trust's policy to cease
recognizing interest income on notes receivable that have been delinquent for
60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable and properties held for sale to the extent
that the investment in the notes or properties exceeds the Trust's estimate of
net realizable value of the property or collateral securing each such note, or
fair value of the collateral if foreclosure is probable. In estimating net
realizable value, consideration is given to the current estimated collateral or
property value adjusted for costs
42
<PAGE> 43
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
to complete or improve, hold and dispose. The provision for losses is based on
estimates, and actual losses may vary from current estimates. Such estimates
are reviewed periodically and any additional provision determined to be
necessary is charged against earnings in the period in which it becomes
reasonably estimable.
Foreclosed real estate held for sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. After foreclosure, the excess of new cost, if any,
over fair value minus estimated costs of sale is recognized in a valuation
allowance. Subsequent changes in fair value either increase or decrease such
valuation allowance. See "Allowance for estimated losses" above. Properties
held for sale are depreciated in accordance with the Trust's established
depreciation policies. See "Real estate and depreciation" below.
Annually, all foreclosed properties held for sale are reviewed by the Trust's
management and a determination is made if the held for sale classification
remains appropriate. The following are among the factors considered in
determining that a change in classification to held for investment is
appropriate: (i) Trust management has no intent to dispose of the property
within the next twelve months; (ii) the property is a "qualifying asset" as
defined in the Internal Revenue Code of 1986, as amended; (iii) property
improvements have been funded; and (iv) the Trust's financial resources are
such that the property can be held long-term. The subsequent classification of
property previously held for sale to held for investment does not result in a
restatement of previously reported revenues, expenses or net income (loss).
Real estate and depreciation. Real estate is carried at the lower of cost or
estimated net realizable value, except for foreclosed properties held for sale,
which are recorded initially at the lower of original cost or fair value minus
estimated costs of sale. Depreciation is provided for by the straight-line
method over the estimated useful lives of the assets, which range from 5 to 40
years.
Present value premiums/discounts. The Trust provides for present value
premiums and discounts on notes receivable or payable that have interest rates
that differ substantially from prevailing market rates and amortizes such
premiums and discounts by the interest method over the lives of the related
notes. The factors considered in determining a market rate for notes
receivable include the borrower's credit standing, nature of the collateral and
payment terms of the note.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full
43
<PAGE> 44
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
profit recognition have been met, transactions are accounted for using either
the deposit, the installment, the cost recovery or the financing method,
whichever is appropriate.
Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships which it does not control. Under the
equity method, the Trust's initial investment, recorded at cost, is increased
by the Trust's proportionate share of the partnership's operating income and
additional advances and decreased by the Trust's share of the partnership's
operating losses and distributions received.
Marketable equity securities. Marketable equity securities are considered to
be available-for-sale and are carried at fair value, defined as period end
closing market value. Net unrealized holding gains and losses are reported as
a separate component of shareholders' equity until realized.
Fair value of financial instruments. The Trust used the following assumptions
in estimating the fair value of its notes receivable, marketable equity
securities and notes payable. For performing notes receivable, the fair value
was estimated by discounting future cash flows using current interest rates for
similar loans. For nonperforming notes receivable, the estimated fair value
of the Trust's interest in the collateral property was used. For marketable
equity securities, fair value was based on the year end closing market price of
each security. The estimated fair values presented do not purport to present
amounts to be ultimately realized by the Trust. The amounts ultimately
realized may vary significantly from the estimated fair values presented. For
notes payable, the fair value was estimated using current rates for mortgages
with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Trust considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Earnings per share. Income (loss) per share of beneficial interest is computed
based upon the weighted average number of shares of beneficial interest
outstanding during each year, adjusted for the three for two forward share
split effected February 15, 1996.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
44
<PAGE> 45
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
<TABLE>
<CAPTION>
1995 1994
------------------------ -----------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Notes receivable
Performing.................. $ 4,697 $ 4,640 $ 4,368 $ 4,720
Nonperforming, nonaccruing.. 2,100 2,100 4,189 6,682
--------- ------- ------- --------
$ 6,797 6,740 $ 8,557 11,402
========= =======
Unamortized (discounts)
/premiums................... (374) (413)
Deferred gain.................. (67) (67)
Interest receivable............ 240 293
------- --------
$ 6,539 $ 11,215
======= ========
</TABLE>
The Trust does not recognize interest income on nonperforming notes receivable.
For the years 1995, 1994 and 1993, unrecognized interest income on
nonperforming notes totaled $554,000, $1.3 million and $681,000, respectively.
Notes receivable at December 31, 1995 mature from 1996 through 2018, with
interest rates ranging from 6.5% to 12.5% and a weighted average rate of 8.3%.
Discounts are based on an imputed interest rate of 12% and premiums are based
on an imputed interest rate of 10%. Notes receivable are nonrecourse and are
collateralized by real estate.
At December 31, 1994, the $1.5 million first mortgage note receivable secured
by the Alderwood Apartments in Detroit, Michigan was in default. In May 1995,
the Trust accepted $1.0 million in cash in full satisfaction of the debt. A
provision for loss of $541,000 was recognized to provide for the loss on the
discounted payoff of the mortgage note receivable.
Also at December 31, 1994, another first mortgage note with a principal balance
at that date of $891,000 was in default. In March 1995, the Trust recorded the
insubstance foreclosure of the collateral property securing the mortgage note
receivable. Foreclosure of the property was completed on May 2, 1995. The
foreclosure resulted in no loss to the Trust, as the property's estimated fair
value at foreclosure, exceeded the carrying value of the note receivable.
At December 31, 1995, two of the Trust's mortgage notes receivable with
principal balances totaling $2.1 million were in default. One of the notes,
with a principal balance of $1.4 million matured in November 1995. The
borrower is currently negotiating with the Trust for an extension of the note
in return for a principal paydown and payment of all accrued interest. 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 other note, with a
45
<PAGE> 46
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
principal balance of $700,000, matured in July 1993. The Trust continues to
receive partial interest payments monthly on the note. The Trust is evaluating
its options with respect to foreclosure of the collateral property and does not
anticipate incurring a loss on this note in excess of previously established
reserves.
In May 1994, the Trust sold the Forest Ridge Shopping Center, a foreclosed
property held for sale, financing the sale through acceptance of a $365,000
purchase money mortgage. See NOTE 4. "REAL ESTATE AND DEPRECIATION."
In December 1994, the Trust received payment in full of the wraparound mortgage
note secured by the Fountainview Retirement Center. The Trust received $5.0
million in cash, equal to the Trust's equity in the wraparound mortgage note.
In addition, the note agreement required that the debtor make an additional
profit participation payment. In settlement of the profit participation, the
borrower assigned a $1.8 million first mortgage, secured by Cypress Creek
Executive Court, an office building in Ft. Lauderdale, Florida, to the Trust
for which the Trust paid $283,000 in cash. The 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."
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Balance January 1,.............. $ 9,223 $ 8,946 $ 9,177
Provision for losses............ 541 - -
Amounts reclassified from
investment in partnerships... - 1,109 -
Write down of property.......... (700) - -
Amounts charged off............. (2,759) (832) (231)
-------- -------- -------
Balance December 31,............ $ 6,305 $ 9,223 $ 8,946
======== ======== =======
</TABLE>
In addition to the above, the provision for losses in the accompanying
Consolidated Statements of Operations consists of a $1.2 million write down of
the carrying value of the Genesee Towers office building to the amount of the
nonrecourse mortgage and a $200,000 loss on the sale of a foreclosed property
held for sale in 1994, and a $221,000 loss on the sale of a foreclosed property
held for sale in 1993. See NOTE 4. "REAL ESTATE AND DEPRECIATION" and NOTE 7.
"NOTES AND INTEREST PAYABLE."
46
<PAGE> 47
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION
In 1995, the Trust purchased four apartment complexes and three industrial
warehouse facilities.
In February 1995, the Trust purchased the Sullyfield Commerce Center, a 243,813
square foot industrial facility in Chantilly, Virginia, for $11.0 million. The
Trust paid $2.2 million in cash and the seller provided mortgage financing for
the remainder of the purchase price.
In March 1995, the Trust purchased the Kelly Warehouses, six industrial
warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for
$5.4 million. The Trust paid $696,000 in cash and obtained new mortgage
financing for the remainder of the purchase price.
In May 1995, the Trust purchased the Willo-Wick Gardens Apartments, a 152 unit
apartment complex in Pensacola, Florida, for $3.6 million. The Trust paid
$687,000 in cash and assumed the existing first mortgage.
In July 1995, the Trust purchased the McCallum Glen Apartments, a 275 unit
apartment complex in Dallas, Texas, for $6.0 million. The Trust paid $1.8
million in cash and obtained new mortgage financing for the remainder of the
purchase price.
In November 1995, the Trust purchased the Willow Wick Apartments, a 104 unit
apartment complex in North Augusta, South Carolina, for $1.5 million. The
Trust paid $595,000 in cash and assumed the existing first mortgage.
In December 1995, the Trust purchased the Heritage on the River Apartments, a
301 unit apartment complex in Jacksonville, Florida, for $7.9 million. The
Trust paid $1.4 million in cash and assumed the existing first mortgage.
Also in December 1995, the Trust purchased the Brookfield Corporate Center, a
63,504 square foot industrial facility in Chantilly, Virginia for $3.5 million.
The Trust paid $650,000 in cash and the seller provided mortgage financing for
the remainder of the purchase price.
In December 1995, the Trust's management made its annual review of the Trust's
real estate portfolio and reclassified the Forest Ridge Apartments, Quail Oaks
Apartments, Sunset Lake Apartments and Woodbridge Apartments from properties
held for sale to properties held for investment. At December 31, 1995,
Rivertree Apartments in Hurst, Texas, was under contract for sale and was
reclassified from properties held for investment to properties held for sale.
In 1994, the Trust purchased the following seven apartment complexes: the
Fountain Lake Apartments, a 166 unit apartment complex in Texas City, Texas;
the McCallum Crossing Apartments, a 322 unit apartment complex in Dallas,
Texas; the Willowcreek Apartments, a 112 unit apartment complex in El Paso,
Texas; the Park Avenue Apartments, a 108
47
<PAGE> 48
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
unit apartment complex in Clute, Texas; the Parkwood Knoll Apartments, a 178
unit apartment complex in San Bernardino, California; the Pierce Towers
Apartments, a 57 unit apartment complex in Denver, Colorado; and the In The
Pines Apartments, a 242 unit apartment complex in Gainesville, Florida; and
one commercial property, the McLeod Commerce Center, a 111,115 square foot
industrial facility in Orlando, Florida, for a total of $32.6 million. The
Trust paid $7.7 million in cash and either obtained new mortgage financing or
assumed existing mortgage debt for the remainder of the purchase prices.
In September 1994, the Trust recorded the insubstance foreclosure of two
apartment complexes, the Sunset Lake Apartments, a 414 unit apartment complex
in Waukegan, Illinois, and the Woodbridge Apartments, a 194 unit apartment
complex in Westminster, Colorado. Both properties had estimated fair values,
less estimated costs of sale, which either approximated or exceeded the
carrying value of the Trust's mortgage notes receivable. The foreclosures
resulted in no loss to the Trust.
In 1994, the Trust sold two shopping centers: Kimberly Square Shopping Center
in Fort Lauderdale, Florida and the Forest Ridge Shopping Center in Denton,
Texas; one apartment complex, the Oak Forest Apartments in Tampa, Florida; a
546 acre tract of undeveloped land in Morgan, Utah; and two single family
residences, one in Arizona and the other in South Dakota, all of which were
foreclosed properties held for sale. The Trust received $2.2 million in cash
and provided purchase money financing of $365,000 in connection with the sales.
The Trust incurred a loss of $200,000 in excess of previously established
reserves on the sale of the apartment complex. No loss in excess of previously
established reserves was recognized on any of the other sales.
NOTE 5. INVESTMENT IN MARKETABLE EQUITY SECURITIES
The Trust's investments in marketable equity securities consist of the
following:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
American Realty Trust, Inc. ("ART")............. $ 3,017 $ 2,659
National Income Realty Trust ("NIRT")........... 941 894
Transcontinental Realty Investors, Inc.("TCI").. 795 788
------------ ------------
$ 4,753 $ 4,341
============ ============
</TABLE>
The Trust's marketable equity securities are considered available-for-sale and
are carried at fair value (period end market value). The Trustees of the Trust
are also directors of TCI and the executive officers of the Trust are also
executive officers of ART and TCI. The Trust's advisor serves as advisor to
ART and TCI and prior to March 31, 1994 to NIRT.
Section 5.3(g) of the Trust's Declaration of Trust limits to 18 months the
period of time that the Trust can hold an investment in an equity security.
The Trust's shareholders approved an amendment to the Trust's
48
<PAGE> 49
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN MARKETABLE EQUITY SECURITIES (Continued)
Declaration of Trust allowing the Trust to hold these shares of ART, NIRT and
TCI until July 30, 1996. At the Annual Meeting of Shareholders to be held in
April 1996, the Trust's shareholders will be asked to repeal Section 5.3(g) of
the Trust's Declaration of Trust which limits the holding period of equity
investments by the Trust.
The Trust has margin arrangements with brokerage firms which provide for
borrowings of up to 50% of the market value of equity securities. The
borrowings under such margin arrangement are secured by equity securities of
ART, NIRT and TCI and bear interest at 8.2% per annum. Margin borrowings were
$411,000 at December 31, 1995 and 1994 and are included in other liabilities in
the accompanying Consolidated Balance Sheets.
NOTE 6. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investments in equity method partnerships consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Sacramento Nine ("SAC 9")........ $ (48) $ 947
Indcon, L.P. ("Indcon").......... 13,018 12,858
-------- --------
$ 12,970 $ 13,805
======== ========
</TABLE>
The Trust, in partnership with NIRT, owns SAC 9, which in turn owns two office
buildings in the vicinity of Sacramento, California. The Trust has a 30%
interest in the partnership's earnings, losses and distributions.
In August 1995, SAC 9 obtained mortgage financing secured by a previously
unencumbered office building in the amount of $3.5 million. SAC 9 received net
cash of $3.4 million after the payment of various closing costs associated with
the financing, of which the Trust's equity share was $1.0 million.
In 1993, SAC 9 sold three of its office buildings for a total of $4.5 million.
SAC 9 received net cash of $2.5 million, of which the Trust's equity share was
$748,000 and 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 the
partnership's earnings, losses and distributions. ISA in turn owns a 100%
interest in Indcon, which owns 31 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.
49
<PAGE> 50
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
In February and March 1996, Indcon completed the sale of 25 of its industrial
warehouses for $36.2 million in cash. Indcon received net cash of $11.1
million, of which the Trust's equity share was $6.7 million, after the payoff
of existing mortgage debt with a principal balance of $23.5 million. Indcon
will recognize a gain of approximately $617,000 on the sale, of which the
Trust's equity share will be approximately $370,000.
Set forth below are summarized financial data for the partnerships the Trust
accounts for using the equity method:
<TABLE>
<CAPTION>
1995 1994
------------- ---------------
<S> <C> <C>
Real estate, net of accumulated
depreciation ($13,736 in 1995 and
$19,318 in 1994)...................... $ 44,712 $ 46,416
Other assets............................. 5,529 4,398
Notes payable............................ (28,391) (25,757)
Other liabilities........................ (390) (335)
------------- ---------------
Partners' capital........................ $ 21,460 $ 24,722
============= ===============
<CAPTION>
1995 1994 1993
------------- --------------- ---------------
<S> <C> <C> <C>
Rents........................ $ 7,766 $ 7,322 $ 7,082
Depreciation................. (2,080) (2,271) (2,016)
Property operations.......... (2,186) (2,772) (2,720)
Interest..................... (3,506) (2,747) (3,050)
------------- --------------- ---------------
(Loss) before gain on sale
of real estate............. (6) (468) (704)
Gain on sale of real estate.. - 962 1,216
------------- --------------- ---------------
Net income (loss)............ $ (6) $ 494 $ 512
============= =============== ===============
</TABLE>
NOTE 7. NOTES AND INTEREST PAYABLE
Notes and interest payable consist of the following:
<TABLE>
<CAPTION>
1995 1994
------------------------ -----------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Notes payable............... $ 126,445 $ 134,262 $ 91,936 $ 97,680
========== ==========
Interest payable............ 1,243 572
---------- ----------
$ 135,505 $ 98,252
========== ==========
</TABLE>
[THIS SPACE INTENTIONALLY LEFT BLANK.]
50
<PAGE> 51
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
<TABLE>
<CAPTION>
Scheduled principal payments on notes payable are due as follows:
<S> <C>
1996............................................... $ 20,612
1997............................................... 21,091
1998............................................... 13,556
1999............................................... 1,710
2000............................................... 14,158
Thereafter......................................... 63,135
------------
$ 134,262
============
</TABLE>
Notes payable at December 31, 1995 bear interest at rates ranging from 3.0% to
10.5% and mature between 1996 and 2024. These notes payable are nonrecourse
and are collateralized by deeds of trust on real estate with a carrying value
of $206.3 million.
In February 1995, after determining that further investment in Genesee Towers,
an office building in Flint, Michigan, could not be justified without a
substantial modification of the mortgage debt, the Trust ceased making debt
service payments on the $8.8 million nonrecourse mortgage secured by the
property. Accordingly, as of December 31, 1994, the Trust wrote down the
carrying value of the property by $1.2 million, which is included in the 1994
provision for losses, to the amount of the nonrecourse mortgage. In February
1996, the Trust and the lender entered into a forbearance agreement that
provides, among other things, that for a period of 90 days, the Trust make
monthly payments of the greater of regular scheduled principal and interest or
cash flow from the property. The deed to the property has been placed in
escrow during the term of the forbearance agreement. The Trust anticipates
that the property will be returned to the lender at the expiration of the
agreement. The Trust does not anticipate incurring a loss as the carrying
value of the property has been written down to the amount of the nonrecourse
mortgage debt, which approximates fair value of the property at December 31,
1995.
In May and December 1995, the Trust refinanced the mortgage debt secured by the
Sunset Lake Apartments in Waukegan, Illinois in the amount of $8.0 million.
The Trust received net cash of $5.3 million after the payoff of $1.9 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
fund repair escrows and to pay various closing costs associated with the
refinancings. The new mortgage bears interest at 7.625% per annum, requires
monthly payments of principal and interest of $60,000 and matures in January
2006.
Also in 1995, the Trust obtained mortgage financing secured by the previously
unencumbered Quail Oaks Apartments in Balch Springs, Texas in the amount of
$750,000. The mortgage bears interest at a variable rate, 9.75% at December
31, 1995, requires monthly payments of principal and interest, currently $7,000
and matures in August 2000. The Trust received net cash of $734,000 after the
payment of various closing costs associated with the financing.
51
<PAGE> 52
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
In 1995, the Trust purchased four apartment complexes and three industrial
warehouse facilities for a total of $38.9 million. In connection with the
acquisitions, the Trust either assumed existing mortgage debt or obtained new
mortgage financing totaling $31.0 million. The new mortgages bear interest at
rates ranging from 6.0% to 9.915% per annum, require monthly payments of
principal and interest, currently totaling $243,000, and mature from May 1997
to January 2013.
In 1994, the Trust obtained mortgage financing secured by the previously
unencumbered Park Lane Apartments in Dallas, Texas, Southgate Apartments in
Roundrock, Texas, 4242 Cedar Springs Apartments in Dallas, Texas and Willow
Creek Apartments in El Paso, Texas in the total amount of $7.5 million. The
Trust received net cash of $6.9 million. The remainder of the financing
proceeds were used to fund escrows for replacements and repairs and to pay
various closing costs associated with the financings. The mortgages bear
interest at rates ranging from 8.66% to 10.25% per annum, require monthly
payments of principal and interest and mature in February 2019, May 2004, June
2004 and January 2002, respectively.
Also in 1994, the Trust refinanced the mortgage debt secured by the Stone Oak
Place Apartments in San Antonio, Texas, in the amount of $3.3 million. The
Trust received net cash of $577,000 after the payoff of $2.5 million in
existing mortgage debt that was scheduled to mature in April 1995. The
remainder of the refinancing proceeds were used to fund escrows for
replacements and repairs and to pay various closing costs associated with the
refinancing. The new $3.3 million mortgage bears interest at 9.9% per annum,
requires monthly principal and interest payments of $31,000 and matures in
August 2004.
In 1994, the Trust purchased seven apartment complexes and one industrial
warehouse facility for a total of $32.7 million. In connection with the
acquisitions, the Trust either assumed existing mortgage debt or obtained new
mortgage financing totaling $23.6 million. The mortgages bear interest at
rates ranging from 5.9% to 9.6% per annum, require monthly payments of
principal and interest totaling $176,000 and mature from December 1997 to July
2011.
NOTE 8. DISTRIBUTIONS
In January 1993, the Trust's Board of Trustees approved the resumption of the
payment of regular quarterly distributions to shareholders. In 1995 and 1994,
the Trust paid distributions of $.40 per share of beneficial interest totaling
$1.8 million in each year. In 1993, the Trust paid distributions of $.33 per
share of beneficial interest totaling $1.5 million.
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1995, 1994 and 1993 represented a return of capital.
52
<PAGE> 53
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as advisor
to the Trust since March 28, 1989. BCM is a company owned by a trust for the
benefit of the children of Gene E. Phillips. Mr. Phillips served as a Trustee
of the Trust until December 31, 1992, as director of BCM until December 22,
1989 and as Chief Executive Officer of BCM until September 1, 1992. Mr.
Phillips serves as a representative of his children's trust which owns BCM and,
in such capacity, has substantial contact with the management of BCM and input
with respect to its performance of advisory services to the Trust.
At the Trust's annual meeting of shareholders held on March 7, 1995, the
Trust's shareholders approved the renewal of the Trust's Advisory Agreement
with BCM through the next annual meeting of the Trust's shareholders.
Subsequent renewals of the Trust's Advisory Agreement with BCM require the
approval of the Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales and acquisitions, lending, foreclosure and
borrowing activity, and other investments. The Advisor is required to report
quarterly to the Trust's Board of Trustees on the Trust's performance against
the business plan. In addition, all transactions or investments by the Trust
shall require prior approval by the Trust's Board of Trustees unless they are
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to the Advisor by the Trust's Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average of the gross
asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee. BCM or an affiliate of BCM is to receive an acquisition commission
for supervising the acquisition, purchase or long-term lease of real estate for
the Trust. BCM or an affiliate of BCM is to receive a mortgage or loan
acquisition fee with respect to the acquisition or purchase of any existing
mortgage loan by the Trust. BCM or an affiliate of BCM is also to receive a
mortgage brokerage and equity refinancing fee for obtaining loans to the Trust
or refinancing on Trust properties and BCM is to receive reimbursement of
certain expenses incurred by it, in the performance of advisory services to the
Trust.
53
<PAGE> 54
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust),
all or a portion of the annual advisory fee must be refunded by the Advisor to
the Trust if the Operating Expenses of the Trust (as defined in the Trust's
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust. The effect of this limitation was to require that BCM refund $250,000
of the annual advisory fee for 1995. The operating expenses of the Trust did
not exceed such limitation in 1994 and 1993.
Additionally, if the Trust were to request that BCM render services to the
Trust other than those required by the Advisory Agreement, BCM or an affiliate
of BCM will be separately compensated for such additional services on terms to
be agreed upon from time to time. As discussed in NOTE 10. "PROPERTY
MANAGEMENT", the Trust has hired Carmel Realty Services, Ltd. ("Carmel", Ltd.),
an affiliate of BCM, to provide property management for the Trust's properties
and, as discussed in NOTE 11. "REAL ESTATE BROKERAGE" the Trust has engaged
Carmel Realty, Inc. ("Carmel Realty"), also an affiliate of BCM, on a
non-exclusive basis, to provide brokerage services for the Trust.
NOTE 10. PROPERTY MANAGEMENT
Carmel, Ltd., an affiliate of BCM, provides property management services to the
Trust for a fee of 5% or less of the monthly gross rents collected on the
properties under its management. Carmel, Ltd. subcontracts with other entities
for the property-level management services to the Trust at various rates. The
general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd.
are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is the sole
shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property- level
management and leasing of twelve of the Trust's commercial properties and the
industrial warehouse facilities owned by one of the real estate partnerships in
which the Trust and NIRT are partners to Carmel Realty, which is owned by SWI.
Carmel Realty is entitled to receive property and construction management fees
and leasing commissions in accordance with the terms of its property-level
management agreement with Carmel, Ltd.
NOTE 11. REAL ESTATE BROKERAGE
Carmel Realty, also an affiliate of BCM, provides brokerage services to the
Trust on a non-exclusive basis. Carmel Realty is entitled to receive a
commission for property acquisitions and sales, in accordance with a sliding
scale of total fees to be paid by the Trust.
54
<PAGE> 55
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM, the Trust's advisor, and its affiliates:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Fees
Advisory................. $ 1,264 $ 1,326 $ 1,160
Real estate brokerage 1,581 1,480 686
Mortgage brokerage and
equity refinancing..... 142 100 33
Property and construction
management fees and
leasing commissions*... 806 570 296
------------ ------------- -------------
$ 3,793 $ 3,476 $ 2,175
============ ============= =============
Cost reimbursements........ $ 506 $ 524 $ 453
============ ============= =============
</TABLE>
_________________________
* Net of property management fees paid to subcontractors, other than Carmel
Realty.
NOTE 13. RENTS UNDER OPERATING LEASES
The Trust's operations include the leasing of commercial properties (office
buildings, industrial facilities and shopping centers). The leases thereon
expire at various dates through 2005. The following is a schedule of minimum
future rents on non-cancelable operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996............................................ $ 8,556
1997............................................ 7,013
1998............................................ 5,174
1999............................................ 2,670
2000............................................ 1,953
Thereafter...................................... 6,992
-------
$32,358
=======
</TABLE>
NOTE 14. INCOME TAXES
For the years 1995, 1994 and 1993, the Trust has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to shareholders, provided that at least
95% of its REIT taxable income, plus 95% of its taxable income from foreclosure
property as defined in Section 857 of the Code, is distributed. See NOTE 8.
"DISTRIBUTIONS."
The Trust had a loss for federal income tax purposes in 1995, 1994 and 1993;
therefore, the Trust recorded no provision for income taxes.
55
<PAGE> 56
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. INCOME TAXES (Continued)
The Trust's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, principally due to
the accounting for gains and losses on property sales, the difference in the
allowance for estimated losses, depreciation on owned properties and
investments in joint venture partnerships. At December 31, 1995, the Trust's
tax basis in its net assets exceeded its basis for financial statement purposes
by $21.5 million. As a result, aggregate future income for income tax purposes
will be less than such amount for financial statement purposes, and the Trust
would be able to maintain its REIT status without distributing 95% of its
financial statement income. Additionally, at December 31, 1995, the Trust had
a tax net operating loss carryforward of $46 million expiring through 2010.
As a result of the Trust's election to be treated as a REIT for income tax
purposes and of its intention to distribute its taxable income, if any, in
future years, no deferred tax asset, liability or valuation allowance was
recorded.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Olive Litigation. In February 1990, the Trust, together with Income
Opportunity Realty Investors, Inc., formerly Income Opportunity Realty Trust
(collectively "IORI"), NIRT and TCI, three real estate entities with, at the
time, the same officers, directors or trustees and advisor as the Trust,
entered into a settlement of a class and derivative action entitled Olive et
al. v. National Income Realty Trust et al. relating to the operation and
management of each of the entities. On April 23, 1990, the court granted final
approval of the terms of the settlement.
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. Final court approval of
the Modification was entered on December 12, 1994. The effective date of the
Modification was 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 until April
28, 1999. In addition, BCM, the Trust's advisor, Gene E. 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, IORI, NIRT and TCI, of
which the Trust's share is $750,000. As of March 1, 1996, the Trust had
received payments totaling $594,000. The remaining $156,000 is to be paid in
monthly installments through August 1, 1996.
56
<PAGE> 57
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
Under the Modification, the Trust, IORI, NIRT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, IORI, NIRT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current members of the
Trust's Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Trust's Board of Trustees appointed pursuant to the
terms of the Modification that stand for reelection during the three calendar
years following the effective date of the Modification.
Pursuant to the terms of the Modification, certain related party transactions
which the Trust may enter into prior to April 28, 1999, require the unanimous
approval of the Trust's Board of Trustees. In addition, such related party
transactions are to be discouraged and 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 IORI, 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, (including the Advisory Agreement, the Brokerage
Agreement and the property management contracts). These agreements, pursuant
to the specific terms of the Modification, require the prior approval by
two-thirds of the Trustees of the Trust, and if required, approval by a
majority of the Trust's shareholders. The Modification requirements for
related party transactions also do not apply to joint ventures between or among
the Trust and IORI, 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.
57
<PAGE> 58
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
The Modification also terminated a number of the provisions of the settlement,
including the requirement that the Trust, IORI, 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.
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, results of operations or liquidity.
NOTE 16. QUARTERLY DATA
The following is a tabulation of the Trust's quarterly results of operations
for the years 1995 and 1994.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------
1995 March 31 June 30 September 30 December 31
- ---- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues...................... $ 8,668 $ 9,627 $ 9,836 $ 10,408
Expenses...................... 9,312 9,710 10,173 10,787
------------ ------------ ------------ ------------
Net (loss).................... $ (644) $ (83) $ (337) $ (379)
============ ============ ============ ============
Earnings per share
Net (loss).................... $ (.15) $ (.02) $ (.08) $ (.08)
============ ============ ============ ============
- ------------------------
</TABLE>
The Trust purchased seven properties in 1995; two industrial facilities in the
first quarter, an apartment complex in each of the second and third quarters,
and two apartment complexes and an industrial facility in the fourth quarter.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------
1994 March 31 June 30 September 30 December 31
- ---- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues...................... $ 6,521 $ 6,800 $ 7,711 $ 8,230
Expenses...................... 6,850 7,399 7,891 9,663
------------ ------------ ------------ ------------
(Loss) from operations........ (329) (599) (180) (1,433)
Gain on sale of real estate... - 577 - 1,131
------------ ------------ ------------ ------------
Net (loss).................... $ (329) $ (22) $ (180) $ (302)
============ ============ ============ ============
Earnings per share
Net (loss).................... $ (.07) $ (.01) $ (.04) $ (.07)
============ ============ ============ ============
</TABLE>
The Trust purchased eight properties in 1994, two apartment complexes in each
of the first and second quarters, two apartment complexes and one industrial
facility in the third quarter and one apartment complex in the fourth quarter.
58
<PAGE> 59
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. QUARTERLY DATA (Continued)
In the second quarter, the Trust recognized a $577,000 gain on the sale of an
industrial warehouse facility by Indcon and in the fourth quarter, the Trust
recognized a $1.1 million gain on the settlement of a profit participation
related to the payoff of one of the Trust's mortgage note receivables.
NOTE 17. SUBSEQUENT EVENTS
In February 1996, the Trust funded a $1.5 million second lien mortgage secured
by the Signature Athletic Club Building in Dallas, Texas. The note bears
interest at 12% per annum and requires monthly interest only payments to the
extent of available cash flow. Any accrued but unpaid interest is added to the
principal balance of the note annually. In addition, the note requires
quarterly principal payments equal to the excess property cash flow for the
quarter. The note matures in October 1998 with an option to extend the note to
December 2000. The Trust has also guaranteed the underlying $3.0 million first
mortgage secured by the property. The Trust has an option to purchase a 50%
interest in the partnership which owns the Signature Athletic Club building for
$100 at any time. The option expires in December 2005.
At December 31, 1995, Rivertree Apartments in Hurst, Texas, was under contract
for sale and was reclassified from properties held for investment to properties
held for sale. In February 1996, the Trust completed the sale of the Rivertree
Apartments for $1.8 million. In conjunction with the sale, the Trust provided
$750,000 of purchase money financing in the form of a wraparound mortgage note.
The Trust received cash of $959,000 after payment of various closing costs
associated with the sale. The Trust will recognize a gain of approximately
$378,000 on the sale.
In March 1996, the Trust purchased the Hampton Court Office Building, a 104,001
square foot office building in Dallas, Texas for $7.7 million. The Trust paid
$1.1 million in cash and obtained new mortgage financing for the remainder of
the purchase price. In conjunction with the financing the Trust established
various escrow accounts in the amount of $1.5 million.
59
<PAGE> 60
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
<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 Investment
- ------------------------------
APARTMENTS
- ----------
Apple Creek........... $ - $ 167 $ 946 $ 194 $ 167 $ 1,140 $ 1,307
Dallas, TX
Camelot............... 3,091 1,230 2,870 87 1,230 2,957 4,187
Largo, FL
Cedar Springs......... 1,429 372 1,117 - 372 1,117 1,489
Dallas, TX
Country Crossings..... 2,708 772 2,444 144 772 2,588 3,360
Tampa, FL
Edgewood.............. 6,654 598 6,872 1,469 598 8,341 8,939
Lansing, IL
El Chapparal.......... 2,675 279 2,821 432 279 3,253 3,532
San Antonio, TX
Fairways.............. 1,175 657 1,532 97 657 1,629 2,286
Longview, TX
Forest Ridge.......... - 212 849 70 212 919 1,131
Denton, TX
Fountain Lake......... 2,465 861 2,585 - 861 2,585 3,446
Texas City, TX
Heritage on the River. 6,501 2,070 6,211 - 2,070 6,211 8,281
Jacksonville, FL
In the Pines.......... 5,339 1,288 5,154 244 1,288 5,398 6,686
Gainesville, FL
McCallum Crossing..... 6,280 2,005 6,017 - 2,005 6,017 8,022
Dallas, TX
McCallum Glen......... 4,134 1,257 5,027 - 1,257 5,027 6,284
Dallas, TX
Park Avenue........... - 224 674 27 224 701 925
Clute, TX
Park Lane............. 1,222 175 978 80 175 1,058 1,233
Dallas, TX
Parkwood Knoll........ 5,103 1,659 4,975 - 1,659 4,975 6,634
San Bernardino, CA
Pierce Tower.......... 1,955 566 2,262 - 566 2,262 2,828
Denver, CO
Ravenswood............ - 130 897 1,219 130 2,116 2,246
Stratford, NJ
Quail Oaks............ 747 90 2,160 92 90 2,252 2,342
Balch Springs, TX
Somerset.............. 2,628 936 2,811 - 936 2,811 3,747
Texas City, TX
Southgate Square...... 2,951 347 1,967 202 347 2,169 2,516
Round Rock, TX
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- --------------------- ------------ ------------ -------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held for Investment
- ------------------------------
APARTMENTS
- ----------
Apple Creek........... $ 198 1971 Dec-90 5-40 years
Dallas, TX
Camelot............... 208 1975 Aug-93 5-40 years
Largo, FL
Cedar Springs......... 98 1984 Jun-92 5-40 years
Dallas, TX
Country Crossings..... 220 1973 Apr-93 5-40 years
Tampa, FL
Edgewood.............. 2,516 1972 Aug-87 5-40 years
Lansing, IL
El Chapparal.......... 940 1963 Jan-88 5-40 years
San Antonio, TX
Fairways.............. 149 1980 Mar-93 5-40 years
Longview, TX
Forest Ridge.......... 136 1975 Nov-91 5-40 years
Denton, TX
Fountain Lake......... 122 1975 Feb-94 5-40 years
Texas City, TX
Heritage on the River. 13 1973 Dec-95 5-40 years
Jacksonville, FL
In the Pines.......... 152 1972 Dec-94 5-40 years
Gainesville, FL
McCallum Crossing..... 276 1985 Mar-94 5-40 years
Dallas, TX
McCallum Glen......... 52 1986 Jul-95 5-40 years
Dallas, TX
Park Avenue........... 30 1981 Jun-94 5-40 years
Clute, TX
Park Lane............. 185 1972 Dec-90 5-40 years
Dallas, TX
Parkwood Knoll........ 176 1986 Aug-94 5-40 years
San Bernardino, CA
Pierce Tower.......... 75 1958 Sep-94 5-40 years
Denver, CO
Ravenswood............ 976 1964 Feb-86 5-40 years
Stratford, NJ
Quail Oaks............ 645 1982 Feb-87 5-40 years
Balch Springs, TX
Somerset.............. 146 1985 Dec-93 5-40 years
Texas City, TX
Southgate Square...... 373 1983 Apr-91 5-40 years
Round Rock, TX
</TABLE>
60
<PAGE> 61
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
(Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
<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 Investment - (Continued)
- ------------------------------
Stone Oak............. $ 3,240 $ 649 $ 2,598 $ 164 $ 649 $ 2,762 $ 3,411
San Antonio, TX
Sunset Lake........... 8,000 1,626 6,544 202 1,626 6,746 8,372
Waukegan, IL
Sunset Towers......... 14,076 4,143 16,554 (642) 4,143 15,912 20,055
San Francisco, CA
Willow Creek.......... 1,835 608 1,832 31 608 1,863 2,471
El Paso, TX
Will-O-Wick........... 2,813 747 2,990 - 747 2,990 3,737
Pensacola, FL
Willow Wick........... 930 324 1,305 - 324 1,305 1,629
North Augusta, NC
Woodbridge............ 959 899 2,099 86 899 2,185 3,084
Westminster, CO
INDUSTRIAL FACILITIES
- ---------------------
Brookfield Corporate
Center.............. 2,800 727 2,909 - 727 2,909 3,636
Chantilly, VA
Kelly Warehouses...... 4,997 1,136 4,856 - 1,136 4,856 5,992
Dallas, TX
McLeod Commerce Center 2,178 673 2,693 86 673 2,779 3,452
Orlando, FL
Northgate Distribution 3,119 876 3,505 215 876 3,720 4,596
Marietta, GA
Sullyfield Commercial
Center.............. 8,800 2,299 9,196 - 2,299 9,196 11,495
Chantilly, VA
OFFICE BUILDINGS
- -----------------
Genesee Towers........ 8,815 212 10,367 (1,048) 212 9,319 9,531
Flint, MI
NASA.................. - 410 3,319 (1,173) 410 2,146 2,556
Houston, TX
Tollhill West......... 5,243 1,634 6,538 909 1,634 7,447 9,081
Dallas, TX
Windsor Plaza......... 863 1,429 4,441 (790) 1,429 3,651 5,080
Windcrest, TX
SHOPPING CENTERS
- ----------------
Builders Square....... 1,230 1,160 1,740 - 1,160 1,740 2,900
St. Paul, MN
Rio Pinar............. 6,095 3,190 5,205 214 3,190 5,419 8,609
-------- --------- --------- --------- --------- ---------- ----------
Orlando, FL
133,052 38,637 149,860 2,611 38,637 152,471 191,108
-------- --------- --------- --------- --------- ---------- ----------
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- --------------------- ------------ ------------ -------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held for Investment - (Continued)
- ------------------------------
Stone Oak............. $ 477 1978 Mar-90 5-40 years
San Antonio, TX
Sunset Lake........... 222 1969 Sep-94 5-40 years
Waukegan, IL
Sunset Towers......... 1,821 1961 Aug-91 5-40 years
San Francisco, CA
Willow Creek.......... 82 1972 May-94 5-40 years
El Paso, TX
Will-O-Wick........... 50 1974 May-95 5-40 years
Pensacola, FL
Willow Wick........... 5 1971 Nov-95 5-40 years
North Augusta, NC
Woodbridge............ 69 1968 Sep-94 5-40 years
Westminster, CO
INDUSTRIAL FACILITIES
- ---------------------
Brookfield Corporate
Center.............. 6 Dec-95 5-40 years
Chantilly, VA
Kelly Warehouses...... 132 Mar-95 5-40 years
Dallas, TX
McLeod Commerce Center 97 1985 Sep-94 5-40 years
Orlando, FL
Northgate Distribution 241 1987 Nov-93 5-40 years
Marietta, GA
Sullyfield Commercial
Center.............. 201 Feb-95 5-40 years
Chantilly, VA
OFFICE BUILDINGS
- -----------------
Genesee Towers........ 877 1968 Oct-92 5-40 years
Flint, MI
NASA.................. 1,053 1979 Oct-85 5-40 years
Houston, TX
Tollhill West......... 1,049 1984 Jun-91 5-40 years
Dallas, TX
Windsor Plaza......... 1,585 1984 Nov-86 5-40 years
Windcrest, TX
SHOPPING CENTERS
- ----------------
Builders Square....... 192 1972 Aug-91 5-40 years
St. Paul, MN
Rio Pinar............. 580 1984 Dec-91 5-40 years
----------
Orlando, FL
16,395
----------
</TABLE>
61
<PAGE> 62
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1995
<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
- ------------------------
APARTMENTS
- ----------
Driftwood............. $ - $ 178 $ 713 $ 19 $ 178 $ 732 $ 910
Detroit, MI
Rivertree............. 751 266 1,063 541 266 1,604 1,870
Hurst, TX
Shadowridge........... - 85 338 138 85 476 561
Rock Springs, WY
INDUSTRIAL FACILITY
- -------------------
Ogden................. - 52 1,568 208 52 1,776 1,828
Ogden, UT
OFFICE BUILDING
- ----------------
Pinemont Office....... 459 175 526 5 175 531 706
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
-------- --------- --------- --------- --------- ---------- ---------
1,210 8,936 4,208 1,017 9,042 5,119 14,161
-------- --------- --------- --------- --------- ---------- ---------
$134,262 $ 47,573 $ 154,068 $ 3,629 $ 47,679 $ 157,591 205,269
======== ========= ========= ========= ========= ==========
Allowance for estimated losses (5,117)
---------
$ 200,152
=========
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- --------------------- ------------ ------------ -------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held for Sale
- ------------------------
APARTMENTS
- ----------
Driftwood............. $ 14
Detroit, MI
Rivertree............. 602 1965 Sep-90 5-40 years
Hurst, TX
Shadowridge........... 89 1973 Jan-91 5-40 years
Rock Springs, WY
INDUSTRIAL FACILITY
- -------------------
Ogden................. 608 1979 Jan-86 5-40 years
Ogden, UT
OFFICE BUILDING
- ----------------
Pinemont Office....... 27 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
---------
1,340
---------
$ 17,735
=========
Allowance for estimated losses
</TABLE>
_____________________________
(1) The aggregate cost for federal income tax purposes is $208,408.
(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.
62
<PAGE> 63
SCHEDULE III
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1,.......................... $ 162,823 $ 121,861 $ 102,575
Additions
Acquisitions and improvements.............. 42,306 35,107 18,608
Foreclosures............................... 891 11,242 -
Settlement of note receivable.............. - - 1,939
Deductions
Sales...................................... (51) (3,558) (1,261)
Permanent write-downs...................... - (1,229) -
Refund of excess acquisition
fees.................................... - (600) -
--------------- --------------- ---------------
Balance at December 31,........................ $ 205,969 $ 162,823 $ 121,861
=============== =============== ===============
Reconciliation of Accumulated
Depreciation
Balance at January 1,.......................... $ 13,459 $ 10,378 $ 8,018
Additions
Depreciation............................... 4,279 3,214 2,431
Deductions
Sales...................................... (3) (133) (71)
--------------- --------------- ---------------
Balance at December 31,........................ $ 17,735 $ 13,459 $ 10,378
=============== =============== ===============
</TABLE>
63
<PAGE> 64
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1995
<TABLE>
<CAPTION>
Interest Maturity Prior Face Amount
Description Rate Date Periodic Payment Terms Liens of Mortgage
- ------------- -------- -------- ---------------------- ----- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
FIRST MORTGAGE LOANS
Buena Vista Office 12.00% 7/93 Monthly principal and interest payments $ - $ 700
secured by office of $8,870.
building in
Titusville, FL.
Country Elms 8.00% 5/02 Monthly interest only payments through - 380
secured by mobile home June 1993. Monthly principal and interest
park in Galesburg, IL. payments of $3,154 beginning July 1993.
Cypress Creek 8.00% 2/09 Monthly payments of principal and interest. - 1,800
secured by office to
building in Ft. 9.00%
Lauderdale, FL.
English Hills 8.50% 6/99 Monthly payments of interest only through June - 590
secured by apartment to 1995. Monthly payments of principal and
complex in Tampa, FL. 9.00% interest thereafter. $25,000 principal pay-
ment due June 1997.
Forest Ridge 7.50% 5/01 Monthly payments of principal and interest. - 365
secured by shopping to
center in Denton, TX. 8.30%
Golden Pond Apartments 7.50% 7/97 Monthly interest only payments. - 990
secured by apartment to
complex in Phoenix, AZ. 9.50%
Henderson County Ranch 12.50% 11/95 Interest and $200,000 principal payment due - 1,500
secured by ranch in November 1, 1994.
Henderson County, TX.
Residential - various 10.00% 02/05 Monthly fixed principal and - 749
7 mortgages secured to to interest payments.
by 7 homes in AZ, MA, 11.50% 04/18
CO and HI.
--------- ---------
$ - $ 7,074
========= =========
<CAPTION>
Carrying Amounts Principal Amount of
of Mortgage Loans Subject to
Net of Discount/ Delinquent Principal
Description Premium(1) or Interest
- ------------- ---------------- --------------------
(dollars in thousands)
<S> <C> <C>
FIRST MORTGAGE LOANS
Buena Vista Office $ 700 (2) $ 700
secured by office
building in
Titusville, FL.
Country Elms 276 -
secured by mobile home
park in Galesburg, IL.
Cypress Creek 1,414 -
secured by office
building in Ft.
Lauderdale, FL.
English Hills 585 -
secured by apartment
complex in Tampa, FL.
Forest Ridge 345 -
secured by shopping
center in Denton, TX.
Golden Pond Apartments 991 -
secured by apartment
complex in Phoenix, AZ.
Henderson County Ranch 1,400(2) 1,400
secured by ranch in
Henderson County, TX.
Residential - various 655 -
7 mortgages secured
by 7 homes in AZ, MA,
CO and HI.
--------- ---------
6,366 $ 2,100
=========
Interest receivable 240
Deferred gain (67)
---------
6,539
Allowance for estimated (1,188)
---------
$ 5,351
=========
</TABLE>
- ------------------------
(1) The aggregate cost for federal income tax purposes is $6,606.
(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.
64
<PAGE> 65
SCHEDULE IV
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1,............. $ 10,989 $ 33,983 $ 36,277
Additions
Funding or purchase of notes
receivable................... - - 52
Loans from sales of properties. - 365 631
Loan received in satisfaction
of profit participation, net
of discount.................. - 1,414 -
Amortization of
discount/(premium)........... 39 (93) (232)
Deductions
Collections of principal....... (1,080) (5,585) (1,743)
Foreclosures................... (891) (10,095) (993)
Prior existing loan assumed by
by borrower.................. - (9,000) -
Discount on payoff............. (541) - -
Write off of uncollectible
mortgage notes receivable.... (2,150) - -
Other.......................... - - (9)
--------------- -------------- ---------------
Balance at December 31,........... $ 6,366 $ 10,989 $ 33,983
=============== ============== ===============
</TABLE>
65
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
___________________________________
PART III
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Trustees
The affairs of Continental Mortgage and Equity Trust (the "Trust" or the
"Registrant") are managed by a Board of Trustees. The Trustees are elected at
the annual meeting of shareholders or appointed by the incumbent Board of
Trustees and serve until the next annual meeting of shareholders or until a
successor has been elected or approved.
The Trustees of the Trust are listed below, together with their ages, terms of
service, all positions and offices with the Trust or its advisor, Basic Capital
Management, Inc. ("BCM" or the "Advisor") their principal occupations, business
experience and directorships with other companies during the last five years or
more. The designation "Affiliated", when used below with respect to a Trustee,
means that the Trustee is an officer, director or employee of the Advisor or an
officer or employee of the Trust. The designation "Independent", when used
below with respect to a Trustee, means that the Trustee is neither an officer
or employee of the Trust nor a director, officer or employee of the Advisor,
although the Trust may have certain business or professional relationships with
such Trustee as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships".
JOHN P. PARSONS: Age 67, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1984) of Pierpont
Corporation; Director of Zentrum Holdings Limited (NZ) (since
1984), the Pickford Foundation (since 1980), International
Divertissments, Ltd. (since 1986), and Lifehouse International,
Ltd.(since 1990); and Director (since January 1995) of Income
Opportunity Realty Investors, Inc., formerly Income Opportunity
Realty Trust (collectively "IORI") and Transcontinental Realty
Investors, Inc. ("TCI").
BENNETT B. SIMS: Age 63, Trustee (Independent) (since April 1990).
Producer (since January 1994) for Blue Train Pictures; Author
(since 1964); Screen and Television Writer (since 1960);
Independent Marketing Consultant (since 1980) for various
companies; Professor of Dramatic Writing (since September 1987) at
Tisch School of the Arts, New York University; Trustee (April 1990
to August 1994) of National Income Realty Trust ("NIRT"); Trustee
(December 1992 to August 1994) of Vinland Property Trust ("VPT");
and Director (since April 1990) of IORI and TCI.
66
<PAGE> 67
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
TED P. STOKELY: Age 62, Trustee (Independent) (since April 1990) and Chairman
of the Board (since January 1995).
General Manager (since January 1995) of ECF Senior Housing
Corporation, a nonprofit corporation; General Manager (since
January 1993) of Housing Assistance Foundation, Inc., a nonprofit
corporation; Part-time unpaid Consultant (since January 1993) and
paid Consultant (April 1992 to December 1992) of Eldercare Housing
Foundation ("Eldercare"), a nonprofit corporation engaged in the
acquisition of low income and elderly housing; President (April
1992 to April 1994) of PSA Group (real estate management and
consulting); Executive Vice President (1987 to 1991) of Key
Companies Inc., a publicly traded company that develops, acquires
and sells water and minerals; Trustee (April 1990 to August 1994)
of NIRT; and Director (since April 1990) and Chairman of the Board
(since January 1995) of IORI and TCI.
MARTIN L. WHITE: Age 56, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1993) of North American
Trading Company Ltd.; President and Chief Operating Officer (since
1992) of Community Based Developers, Inc.; Development Officer and
Loan Manager (1986 to 1992) of the City of San Jose, California;
Vice President and Director of Programs (1967 to 1986) of Arpact,
Inc., a government contractor for small business development and
trade; and Director (since January 1995) of IORI and TCI.
EDWARD G. ZAMPA: Age 61, Trustee (Independent) (since January 1995).
General Partner (since 1976) of Edward G. Zampa and Company; and
Director (since January 1995) of IORI and TCI.
Board Committees
The Trust's Board of Trustees held 13 meetings during 1995. For such year, no
incumbent Trustee attended fewer than 75% of the aggregate of (i) the total
number of meetings held by the Board of Trustees during the period for which he
had been a Trustee and (ii) the total number of meetings held by all committees
of the Board of Trustees on which he served during the period that he served.
The Trust's Board of Trustees has an Audit Committee, the function of which is
to review the Trust's operating and accounting procedures. The current members
of the Audit Committee, all of whom are Independent Trustees, are Messrs.
Parsons (Chairman), Stokely and White. The Audit Committee met twice during
1995.
In June 1995, the Trust's Board of Trustees authorized the creation of a
Relationship with Advisor Committee, a Board Development Committee and
67
<PAGE> 68
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Board Committees (Continued)
a Corporate Vision Committee. The current members of the Relationship with
Advisor Committee are Messrs. Parsons and Zampa. The Relationship with Advisor
Committee reviews and reports to the Trust's Board of Trustees on the services
provided to the Trust by the Advisor and its affiliates and the terms of any
engagement or compensation of the Advisor or its affiliates. The Relationship
with Advisor Committee met once in 1995. The Board Development Committee
reviews and reports to the Trust's Board of Trustees on the membership,
compensation and functions of the Board of Trustees. The current members of
the Board Development Committee are Messrs. Sims and White. The Board
Development Committee held no meetings in 1995. The Corporate Vision Committee
is to review and report to the Trust's Board of Trustees on the Trust's
short-term and long-term strategic objectives. As of March 15, 1996, the
members had not been appointed to the Corporate Vision Committee.
The Trust's Board of Trustees does not have Nominating or Compensation
Committees.
Executive Officers
The following persons currently serve as executive officers of the Trust:
Randall M. Paulson, President; Bruce A. Endendyk, Executive Vice President;
and Thomas A. Holland, Executive Vice President and Chief Financial Officer.
Their positions with the Trust are not subject to a vote of shareholders.
Their ages, terms of service, all positions and offices with the Trust or BCM,
other principal occupations, business experience and directorships with other
companies during the last five years or more are set forth below.
RANDALL M. PAULSON: Age 49, President (since August 1995) and Executive Vice
President (January 1995 to August 1995).
President (since August 1995) of BCM, IORI and TCI and Executive
Vice President (October 1994 to August 1995) of BCM and (January
1995 to August 1995) of IORI, TCI and Syntek Asset Management, Inc.
("SAMI"), the managing general partner of Syntek Asset Management,
L.P. ("SAMLP"), which is the general partner of National Realty,
L.P. ("NRLP") and National Operating, L.P. ("NOLP"); Director (since
August 1995) of SAMI; Executive Vice President (since January 1995)
of American Realty Trust, Inc. ("ART"); Vice President (1993 to
1994) of GSSW, LP, a joint venture of Great Southern Life and
Southwestern Life; Vice President (1990 to 1993) of Property
Company of America Realty, Inc.; President (1990) of Paulson Realty
Group; President (1983 to 1989) of Johnstown Management Company;
and Vice President (1979 to 1982) of Lexton-Ancira.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
68
<PAGE> 69
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Executive Officers (Continued)
BRUCE A. ENDENDYK: Age 47, Executive Vice President (since January 1995).
President (since January 1995) of Carmel Realty, Inc. ("Carmel
Realty"), a company owned by Syntek West, Inc. ("SWI"); Executive
Vice President (since January 1995) of BCM, SAMI, ART, IORI and
TCI; Management Consultant (November 1990 to December 1994);
Executive Vice President (January 1989 to November 1990) of
Southmark Corporation ("Southmark"); President and Chief Executive
Officer (March 1988 to January 1989) of Southmark Equities
Corporation; and Vice President/Resident Manager (December 1975 to
March 1988) of Coldwell Banker Commercial/Real Estate Services in
Houston, Texas.
THOMAS A. HOLLAND: Age 53, Executive Vice President and Chief Financial
Officer (since August 1995) and Senior Vice President and Chief Accounting
Officer (July 1990 to August 1995).
Executive Vice President and Chief Financial Officer (since August
1995) and Senior Vice President and Chief Accounting Officer (July
1990 to August 1995) of BCM, SAMI, ART, IORI and TCI; Senior Vice
President and Chief Accounting Officer (July 1990 to February 1994)
of NIRT and VPT; Vice President and Controller (December 1986 to
June 1990) of Southmark; Vice President- Finance (January 1986 to
December 1986) of Diamond Shamrock Chemical Company; Assistant
Controller (May 1976 to January 1986) of Maxus Energy Corporation
(formerly Diamond Shamrock Corporation); Trustee (August 1989 to
June 1990) of Arlington Realty Investors; and Certified Public
Accountant (since 1970).
Officers
Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust: Robert A. Waldman, Senior Vice President,
General Counsel and Secretary; and Drew D. Potera, Treasurer. Their positions
with the Trust are not subject to a vote of shareholders. Their ages, terms of
service, all positions and offices with the Trust or
[THIS SPACE INTENTIONALLY LEFT BLANK.]
69
<PAGE> 70
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Officers (Continued)
BCM, other principal occupations, business experience and directorships with
other companies during the last five years or more are set forth below.
ROBERT A. WALDMAN: Age 43, Senior Vice President and General Counsel (since
January 1995), Vice President (December 1990 to January 1995) and Secretary
(since December 1993).
Senior Vice President and General Counsel (since January 1995);
Vice President (December 1990 to January 1995) and Secretary (since
December 1993) of IORI and TCI; Senior Vice President and General
Counsel (since January 1995), Vice President (January 1993 to
January 1995) and Secretary (since December 1989) of ART; Senior
Vice President and General Counsel (since November 1994), Vice
President and Corporate Counsel (November 1989 to November 1994)
and Secretary (since November 1989) of BCM; Senior Vice President
and General Counsel (since January 1995), Vice President (April
1990 to January 1995) and Secretary (since December 1990) of SAMI;
Vice President (December 1990 to February 1994) and Secretary
(December 1993 to February 1994) of NIRT and VPT; Director
(February 1987 to October 1989) and General Counsel and Secretary
(1985 to October 1989) of Red Eagle Resources Corporation (oil and
gas); Assistant General Counsel, Senior Staff Attorney and Staff
Attorney (1981 to 1985) of Texas International Company (oil and
gas); and Staff Attorney (1979 to 1981) of Iowa Beef Processors,
Inc.
DREW D. POTERA: Age 36, Treasurer (since December 1990).
Treasurer (since December 1990) of IORI and TCI; Treasurer (since
August 1991) and Assistant Treasurer (December 1990 to August 1991)
of ART; Vice President, Treasurer and Securities Manager (since
July 1990) of BCM; Vice President and Treasurer (since February
1992) of SAMI; Treasurer (December 1990 to February 1994) of NIRT
and VPT; and Financial Consultant with Merrill Lynch, Pierce,
Fenner & Smith Incorporated (June 1985 to June 1990).
In addition to the foregoing officers, the Trust has several vice presidents
and assistant secretaries who are not listed herein.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the Trust's Trustees, executive
officers, and any persons holding more than ten percent of the Trust's shares
of beneficial interest are required to report their ownership of the Trust's
shares and any changes in that ownership to the Securities and Exchange
Commission (the "Commission"). Specific due dates for these reports have been
established and the Trust is required to report any failure to file by these
dates during 1995. All of these
70
<PAGE> 71
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Compliance with Section 16(a) of the Securities Exchange Act of 1934
(Continued)
filing requirements were satisfied by its Trustees and executive officers and
ten percent holders. In making these statements, the Trust has relied on the
written representations of its incumbent Trustees and executive officers and
its ten percent holders and copies of the reports that they have filed with the
Commission.
The Advisor
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by a contractual advisor under
the supervision of the Trust's Board of Trustees. The duties of the advisor
include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities
for the Trust. The advisor also serves as a consultant to the Trusts' Board of
Trustees in connection with the business plan and investment policy decisions.
BCM has served as the Trust's advisor since March 1989. BCM is a corporation
of which Messrs. Paulson, Endendyk and Holland serve as executive officers.
BCM is owned by a trust for the benefit of the children of Mr. Phillips. Prior
to December 22, 1989, Mr. Phillips also served as a director of BCM, and until
September 1, 1992, as Chief Executive Officer of BCM. Mr. Phillips serves as
a representative of his children's trust which owns BCM and, in such capacity,
has substantial contact with the management of BCM and input with respect to
its performance of advisory services to the Trust.
At the Trust's annual meeting of shareholders held on March 7, 1995, the
Trust's shareholders approved the renewal of the Trust's Advisory Agreement
with BCM through the next annual meeting of the Trust's shareholders.
Subsequent renewals of the Trust's Advisory Agreement with BCM require the
approval of the Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales and acquisitions, lending, foreclosure and
borrowing activity, and other investments, and the Advisor is required to
report quarterly to the Trust's Board of Trustees on the Trust's performance
against the business plan. In addition, all transactions or investments by the
Trust shall require prior approval by the Trust's Board of Trustees unless they
are explicitly provided for in the approved business plan or are made pursuant
to authority expressly delegated to the Advisor by the Trust's Board of
Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides
71
<PAGE> 72
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
that the Advisor shall be deemed to be in a fiduciary relationship to the
Trust's shareholders; contains a broad standard governing the Advisor's
liability for losses by the Trust; and contains guidelines for the Advisor's
allocation of investment opportunities as among itself, the Trust and other
entities it advises.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average of the gross
asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by the Trust during such fiscal year
exceeds the sum of: (i) the cost of each such property as originally recorded
in the Trust's books for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (ii) capital improvements made to such
assets during the period owned by the Trust, and (iii) all closing costs,
(including real estate commissions) incurred in the sale of such property;
provided, however, no incentive fee shall be paid unless (a) such real estate
sold in such fiscal year, in the aggregate, has produced an 8% simple annual
return on the Trust's net investment including capital improvements, calculated
over the Trust's holding period before depreciation and inclusive of operating
income and sales consideration and (b) the aggregate net operating income from
all real estate owned by the Trust for each of the prior and current fiscal
years shall be at least 5% higher in the current fiscal year than in the prior
fiscal year.
Additionally, pursuant to the Advisory Agreement, BCM or an affiliate of BCM is
to receive an acquisition commission for supervising the acquisition, purchase
or long-term lease of real estate for the Trust equal to the lesser of (i) up
to 1% of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers or (ii) the compensation customarily charged in
arm's-length transactions by others rendering similar property acquisition
services as an ongoing public activity in the same geographical location and
for comparable property; provided that the aggregate purchase price of each
property (including acquisition fees and all real estate brokerage commissions)
may not exceed such property's appraised value at acquisition.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust; provided,
however, that the compensation retained by BCM or any affiliate of BCM shall
not exceed the lesser of (i) 2% of the amount of the loan committed by the
Trust or (ii) a loan brokerage and commitment fee which is reasonable and fair
under the circumstances.
72
<PAGE> 73
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
The Advisory Agreement also provides that BCM or an affiliate of BCM is to
receive a mortgage or loan acquisition fee with respect to the acquisition or
purchase of any existing mortgage loan by the Trust equal to the lesser of (i)
1% of the amount of the loan purchased or (ii) a loan brokerage or commitment
fee which is reasonable and fair under the circumstances. Such fee will not be
paid in connection with the origination or funding by the Trust of any mortgage
loan.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive a
mortgage brokerage and equity refinancing fee for obtaining loans to the Trust
or refinancing on Trust properties equal to the lesser of (i) 1% of the amount
of the loan or the amount refinanced or (ii) a brokerage or refinancing fee
which is reasonable and fair under the circumstances; provided, however, that
no such fee shall be paid on loans from BCM or an affiliate of BCM without the
approval of the Trust's Board of Trustees. No fee shall be paid on loan
extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of certain
expenses incurred by it, in the performance of advisory services to the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust),
all or a portion of the annual advisory fee must be refunded by the Advisor to
the Trust if the Operating Expenses of the Trust (as defined in the Trust's
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust based on the book value, net asset value and net income of the Trust
during such fiscal year. The effect of this limitation was to require that BCM
refund $250,000 of the 1995 annual advisory fee. The operating expenses of the
Trust did not exceed such limitation in 1994 or 1993.
Additionally, if the Trust were to request that BCM render services to the
Trust other than those required by the Advisory Agreement, BCM or an affiliate
of BCM will be separately compensated for such additional services on terms to
be agreed upon from time to time. As discussed below, under "Property
Management", the Trust has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."),
an affiliate of BCM, to provide property management for the Trust's properties.
Also as discussed below, under "Real Estate Brokerage" the Trust has engaged
Carmel Realty, also an affiliate of BCM, on a non-exclusive basis, to perform
brokerage services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of the Trust.
The directors and principal officers of BCM are set forth below.
MICKEY N. PHILLIPS: Director
RYAN T. PHILLIPS: Director
73
<PAGE> 74
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
RANDALL M. PAULSON: President
MARK W. BRANIGAN: Executive Vice President
OSCAR W. CASHWELL: Executive Vice President
BRUCE A. ENDENDYK: Executive Vice President
THOMAS A. HOLLAND: Executive Vice President and Chief Financial
Officer
COOPER B. STUART: Executive Vice President
CLIFFORD C. TOWNS, JR Executive Vice President, Finance
ROBERT A. WALDMAN: Senior Vice President, Secretary and General
Counsel
DREW D. POTERA: Vice President, Treasurer and Securities
Manager
Mickey N. Phillips is Gene E. Phillips brother and Ryan T. Phillips is Gene E.
Phillips' son. Gene E. Phillips serves as a representative of the trust
established for the benefit of his children which owns BCM and, in such
capacity, Mr. Phillips has substantial contact with the management of BCM and
input with respect to its performance of advisory services to the Trust.
Property Management
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently Carmel, Ltd. provides such property
management services for a fee of 5% or less of the monthly gross rents
collected on the properties under its management. Carmel, Ltd. subcontracts
with other entities for the provision of the property-level management services
to the Trust at various rates. The general partner of Carmel, Ltd. is BCM.
The limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the
sole shareholder, (ii) Mr. Phillips and, (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of twelve of the Trust's commercial properties and the
industrial warehouse facilities owned by one of the real estate partnerships in
which the Trust and NIRT are partners to Carmel Realty which is a company owned
by SWI. Carmel Realty is entitled to receive property and construction
management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Carmel, Ltd.
74
<PAGE> 75
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Real Estate Brokerage
Since December 1, 1992, Carmel Realty has been engaged, on a non-exclusive
basis to provide brokerage services for the Trust. Carmel Realty is entitled
to receive a commission for property acquisitions and sales by the Trust in
accordance with the following sliding scale of total fees to be paid by the
Trust: (i) maximum fee of 5% on the first $2.0 million of any purchase or sale
transaction of which no more than 4% would be paid to Carmel Realty or
affiliates; (ii) maximum fee of 4% on transaction amounts between $2.0 million
- - $5.0 million of which no more than 3% would be paid to Carmel Realty or
affiliates; (iii) maximum fee of 3% on transaction amounts between $5.0 million
- - $10.0 million of which no more than 2% would be paid to Carmel Realty or
affiliates; and (iv) maximum fee of 2% on transaction amounts in excess of
$10.0 million of which no more than 1 1/2% would be paid to Carmel Realty or
affiliates.
ITEM 11. EXECUTIVE COMPENSATION
The Trust has no employees, payroll or benefit plans and pays no compensation
to the executive officers of the Trust. The executive officers of the Trust
who are also officers or employees of BCM, the Trust's Advisor, are compensated
by the Advisor. Such executive officers of the Trust perform a variety of
services for the Advisor and the amount of their compensation is determined
solely by the Advisor. BCM does not allocate the cash compensation of its
officers among the various entities for which it serves as advisor. See Item
10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor"
for a more detailed discussion of the compensation payable to BCM by the Trust.
The only remuneration paid by the Trust is to the Trustees who are not officers
or directors of BCM or its affiliated companies. The Independent Trustees (i)
review the business plan of the Trust to determine that it is in the best
interest of the Trust's shareholders, (ii) review the Trust's contract with the
advisor, (iii) supervise the performance of the Trust's advisor and review the
reasonableness of the compensation which the Trust pays to its advisor in terms
of the nature and quality of services performed, (iv) review the reasonableness
of the total fees and expenses of the Trust and (v) select, when necessary, a
qualified independent real estate appraiser to appraise properties acquired by
the Trust. Until January 1, 1995, the Independent Trustees received
compensation in the amount of $6,000 per year, plus reimbursement for expenses.
In addition, each Independent Trustee received (i) $3,000 per year for each
committee of the Board of Trustees on which he served, (ii) $2,500 per year for
each committee chairmanship, and (iii) $1,000 per day for any special services
rendered by him to the Trust outside of his ordinary duties as Trustee, plus
reimbursement of expenses.
On June 9, 1995, the Trust's Board of Trustees revised the compensation to be
paid to Independent Trustees effective as of January 1, 1995. Each Independent
Trustee shall receive compensation in the amount of $15,000 per year, plus
reimbursement for expenses and the Chairman of the Board
75
<PAGE> 76
ITEM 11. EXECUTIVE COMPENSATION (Continued)
shall receive an additional $1,500 per year for serving in such position. In
addition, each Independent Trustee shall receive an additional fee of $1,000
per day for any special services rendered by him to the Trust outside of his
ordinary duties as Trustee, plus reimbursement of expenses.
During 1995, $86,800 was paid to the Independent Trustees in total Trustees'
fees for all services, including the annual fee for service during the period
January 1, 1995 through December 31, 1995, and 1995 special service fees as
follows: Geoffrey C. Etnire, $8,000; Harold Furst, Ph.D., $15,000; John P.
Parsons, $15,000; Bennett B. Sims, $7,300; Ted P. Stokely, $11,500; Martin L.
White, $15,000, and Edward G. Zampa, $15,000.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
76
<PAGE> 77
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Performance Graph
The following performance graph compares the cumulative total shareholder
return on the Trust's shares of beneficial interest with the Standard & Poor's
500 Stock Index ("S&P 500 Index") and the National Association of Real Estate
Investment Trusts, Inc. Hybrid REIT Total Return Index ("REIT Index"). The
comparison assumes that $100 was invested on December 31, 1990 in the Trust's
shares of beneficial interest and in each of the indices and further assumes
the reinvestment of all dividends. Past performance is not necessarily an
indicator of future performance.
[COMPARISON OF FIVE YEAR GRAPH]
[CUMULATIVE TOTAL RETURN]
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
THE TRUST 100 184 165 356 433 436
S&P 500 INDEX 100 131 141 155 157 215
REIT INDEX 100 139 162 197 204 251
</TABLE>
77
<PAGE> 78
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 15,
1996.
<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. 1,630,065 38%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Basic Capital Management, Inc. 467,549 11%
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231
- -------------------------
</TABLE>
(1) Percentages are based upon 4,246,868 shares of beneficial interest
outstanding at March 15, 1996.
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 15, 1996.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
- -------------------------- ------------------- ----------
<S> <C> <C>
All Trustees and Executive 2,097,614(2) 49%
Officers as a group
(8 individuals)
- ---------------------------
</TABLE>
* Less than 1%.
(1) Percentage is based upon 4,246,868 shares of beneficial interest issued
and outstanding at March 15, 1996.
(2) Includes 1,630,065 shares owned by ART and 467,549 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 of ART and BCM.
The Trust's executive officers disclaim beneficial ownership of such
shares. Each of the directors of ART, 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 may be deemed to be
beneficial owners of the
78
<PAGE> 79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
shares owned by BCM by virtue of their positions as directors of
BCM. The directors of ART and BCM disclaim such beneficial
ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Trust's Board of Trustees voted to retain BCM as the
Trust's advisor. See ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor." BCM is a company of which Messrs. Paulson, Endendyk
and Holland serve as executive officers. Gene E. Phillips served as a director
of BCM until December 22, 1989 and as Chief Executive Officer of BCM until
September 1, 1992. BCM is owned by a trust for the benefit of the children of
Mr. Phillips. Mr. Phillips serves as a representative of his children's trust
which owns BCM and, in such capacity, has substantial contact with the
management of BCM and input with respect to its performance of advisory
services to the Trust.
Since February 1, 1991, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel, Ltd. provides such property
management services. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole
shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of twelve of the Trust's commercial properties and the
industrial warehouse facilities owned by one of the real estate partnerships in
which the Trust and NIRT are partners to Carmel Realty, which is a company
owned by SWI.
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. Since December 1, 1992, the Trust has engaged, on a non-exclusive
basis, Carmel Realty to perform brokerage services to the Trust. Carmel Realty
is a company owned by SWI.
The Trustees and officers of the Trust also serve as directors and officers of
IORI and TCI. The Trustees owe fiduciary duties to such entities as well as to
the Trust under applicable law. IORI and TCI have the same relationship with
BCM as the Trust. Mr. Phillips is a general partner of SAMLP, the general
partner of NRLP and NOLP. BCM performs certain administrative functions for
NRLP and NOLP on a cost-reimbursement basis. BCM also serves as advisor to
ART. Mr. Phillips served as Chairman of the Board and as a director of ART
until November 16, 1992. Messrs. Paulson, Endendyk and Holland serve as
executive officers of ART.
From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid
Consultant and since January 1, 1993 as a part-time unpaid Consultant for
Eldercare, a nonprofit corporation engaged in the acquisition of low income and
elderly housing. Eldercare has a revolving loan commitment from SWI, of which
Mr. Phillips is the sole shareholder. Eldercare filed
79
<PAGE> 80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Certain Business Relationships (Continued)
for bankruptcy protection in July 1993, and was dismissed from bankruptcy on
October 12, 1994. Eldercare again filed for bankruptcy protection in May 1995.
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties. The
Trust's management believes that all of the related party transactions
represented the best investments available at the time and were at least as
advantageous to the Trust as could have been obtained from unrelated third
parties.
As more fully described in ITEM 2. "PROPERTIES - Real Estate," the Trust is
engaged with NIRT in the Sacramento Nine and Indcon, L.P. partnerships.
In September 1990, the Trust's Board of Trustees authorized the purchase of up
to $2.0 million of the common shares of ART through negotiated or open market
transactions. The Trust's advisor also serves as advisor to ART and at March
15, 1996 ART owned approximately [38]% of the Trust's outstanding shares of
beneficial interest. At December 31, 1995, the Trust owned 409,044 shares of
ART common stock which the Trust had purchased in open market transactions in
1990 and 1991 at a total cost to the Trust of $1.6 million. At December 31,
1995, the market value of the ART shares was $3.0 million. See ITEM 2.
"PROPERTIES - Equity Investments in Real Estate Entities."
In December 1990, the Trust's Board of Trustees authorized the purchase of up
to $1.0 million of the shares of beneficial interest of NIRT and up to $1.0
million of the shares of TCI common stock through negotiated or open market
transactions. The Trustees of the Trust serve as directors of TCI. The
officers of the Trust also serve as officers of TCI. BCM, the Trust's advisor,
also serves as advisor to TCI. Until March 31, 1994, BCM also served as
advisor to NIRT. At December 31, 1995, the Trust owned 84,580 shares of
beneficial interest of NIRT at a total cost of $415,000 and 79,500 shares of
TCI common stock at a total cost of $235,000 all of which the Trust had
purchased in open market transactions in 1990 and 1991. At December 31, 1995,
the market value of the NIRT shares was $941,000 and the market value of the
TCI common stock was $795,000. See ITEM 2. "PROPERTIES - Equity Investments in
Real Estate Entities."
In 1995, the Trust paid BCM and its affiliates $1.3 million in advisory fees,
$1.6 million in real estate brokerage commissions, $142,000 in mortgage
brokerage and equity refinancing fees and $806,000 in property and construction
management fees and leasing commissions (net of property management fees paid
to subcontractors, other than Carmel Realty). In addition, also as provided in
the Advisory Agreement, BCM received cost reimbursements from the Trust of
$506,000 in 1995.
80
<PAGE> 81
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions
The Trust's Declaration of Trust provides that:
"The Trustees shall not...purchase, sell or lease any Real Properties or
Mortgages to or from...the Advisor or any of [its] Affiliates," and that
[t]he Trustees shall not...make any loan to...the Advisor or any of [its]
Affiliates."
The Declaration of Trust further provides that:
"The Trust shall not purchase or lease, directly or indirectly, any Real
Property or purchase any Mortgage from the Advisor or any affiliated
Person, or any partnership in which any of the foregoing may also be a
general partner, and the Trust will not sell or lease, directly or
indirectly, any of its Real Property or sell any Mortgage to any of the
foregoing Persons." The Declaration of Trust further provides that "the
Trust shall not directly or indirectly, engage in any transaction with
any Trustee, officer or employee of the Trust or any director, officer or
employee of the Advisor...or of any company or other organization of
which any of the foregoing is an Affiliate, except for...[among other
things] transactions with...the Advisor or Affiliates thereof involving
loans, real estate brokerage services, real property management services,
the servicing of Mortgages, the leasing of real or personal property, or
other services, provided such transactions are on terms not less
favorable to the Trust than the terms on which nonaffiliated parties are
then making similar loans or performing similar services for comparable
entities in the same area and are not entered into on an exclusive
basis."
The Declaration of Trust further provides that:
"The Trustees shall not...invest in any equity Security, including the
shares of other REITs for a period in excess of 18 months, except for
shares of a qualified REIT subsidiary, as defined in Section 856(i) of
the Internal Revenue Code, and regular or residual interests in
REMICs...[or] acquire Securities in any company holding investments or
engaging in activities prohibited by this Section..."
The Declaration of Trust defines "Affiliate" as follows:
"As to any Person, any other Person who owns beneficially, directly or
indirectly, 1% or more of the outstanding capital stock, shares, or
equity interests of such Person or of any other Person which controls, is
controlled by, or is under common control with, such Person or is an
officer, retired officer, director, employee, partner, or trustee
(excluding independent trustees not otherwise affiliated with the entity)
of such Person or of any other Person which controls, is controlled by,
or is under common control with, such Person."
81
<PAGE> 82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
From 1990 until January 1995, all related party transactions that the Trust
entered into were required to be reviewed by the Related Party Transaction
Committee of the Trust's Board of Trustees to determine whether such
transactions were (i) fair to the Trust and (ii) were permitted by the Trust's
governing documents. Each of the members of the Related Party Transaction
Committee was a Trustee who was not an officer, director or employee of BCM,
the Trust's advisor, and was not an officer or employee of the Trust. The
Related Party Transaction Committee was terminated by the Trust's Board of
Trustees on January 11, 1995.
Pursuant to the terms of the Modification of Stipulation of Settlement (the
"Modification") in the Olive Litigation, as more fully discussed in ITEM 3.
"LEGAL PROCEEDINGS - Olive Litigation," which became effective on January 11,
1995, certain related party transactions which the Trust may enter into prior
to April 28, 1999, require the unanimous approval of the Trust's Board of
Trustees. In addition, such related party transactions are to be discouraged
and may only be entered into in exceptional circumstances and after a
determination by the Trust's Board of Trustees that the transaction is in the
best interests of the Trust and that no other opportunity exists that is as
good as the opportunity presented by such transaction.
The Modification 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, (including the Advisory Agreement, the Brokerage
Agreement and the property management contracts). These agreements, pursuant
to the specific terms of the Modification, require the prior approval by
two-thirds of the Trustees of the Trust, and if required, approval by a
majority of the Trust's shareholders. The Modification requirements for
related party transactions also do not apply to joint ventures between or among
the Trust and IORI, 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.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
82
<PAGE> 83
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets -
December 31, 1995 and 1994
Consolidated Statements of Operations -
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows -
Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this report:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -------------------------------------------------------------
<S> <C>
3.0 Second Amended and Restated Declaration of Trust (incorporated by reference to the Registrant's Current
Report on Form 8-K dated August 14, 1987).
3.1 Amendment No. 1 to Second Amended and Restated Declaration of Trust, (incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 5, 1989) reporting change in name of Trust.
</TABLE>
83
<PAGE> 84
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -------------------------------------------------------------
<S> <C>
3.2 Amendment No. 2 to Second Amended and Restated Declaration of Trust (incorporated by reference to the
Registrant's Current Report on Form 8-K dated March 22, 1990) reporting deletion of liquidation provision.
3.3 Restated Trustees' Regulations dated as of April 21, 1989 (incorporated by reference to the current report on
Form 8-K dated March 24, 1989).
10.0 Advisory Agreement dated as of March 7, 1995, between Continental Mortgage and Equity Trust and Basic Capital
Management, Inc., filed herewith.
10.2 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).
10.3 Brokerage Agreement dated as of February 11, 1995, between Continental Mortgage and Equity Trust and Carmel
Realty, Inc., (incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.4 Brokerage Agreement dated as of February 11, 1996, between Continental Mortgage and Equity Trust and Carmel
Realty, Inc., filed herewith.
27.0 Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated November 30, 1995, was filed
with respect to Item 2, "Acquisition or Disposition of Assets",
which reports the acquisition of Willow Wick and Heritage on the
River Apartments, which was amended on Form 8-K/A, filed September
7, 1995.
A Current Report on Form 8-K, dated December 28, 1995, was filed
with respect to Item 2. "Acquisition and Disposition of Assets"
which reports the acquisition of the Brookfield Corporate Center,
which was amended on Form 8-K/A, filed February 20, 1996.
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<PAGE> 85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
CONTINENTAL MORTGAGE AND EQUITY TRUST
Dated: March , 1996 By: /s/ Randall M. Paulson
----------------------------------- -------------------------------------
Randall M. Paulson
President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C>
By: /s/ John P. Parsons By: /s/ Martin L. White
-------------------------------------- -------------------------------------
John P. Parsons Martin L. White
Trustee Trustee
By: /s/ Bennett B. Sims By: /s/ Edward G. Zampa
-------------------------------------- -------------------------------------
Bennett B. Sims Edward G. Zampa
Trustee Trustee
By: /s/ Ted P. Stokely
--------------------------------------
Ted P. Stokely
Trustee
By: /s/ Thomas A. Holland
-------------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: March , 1996
------------------------------------
</TABLE>
85
<PAGE> 86
CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------------- ------
<S> <C> <C>
10.4 Brokerage Agreement dated as of February 11, 87
1996, between Continental Mortgage and
Equity Trust and Carmel Realty, Inc.
27.0 Financial Data Schedule. 95
</TABLE>
86
<PAGE> 1
EXHIBIT 10.4
BROKERAGE AGREEMENT
BETWEEN
CONTINENTAL MORTGAGE AND EQUITY TRUST
AND
CARMEL REALTY, INC.
THIS BROKERAGE AGREEMENT dated as of February 11, 1996, between
Continental Mortgage and Equity Trust, a California business trust (the
"Trust"), and Carmel Realty, Inc. (the "Broker"), a Texas corporation.
WITNESSETH:
WHEREAS:
1. The Trust is an active real estate investment trust with funds
available for investment primarily in the acquisition of real estate.
2. The Trust owns a diversified portfolio of real estate which includes
properties which by reason of their size, location and quality, require special
efforts to sell and the Trust desires to sell certain of such property and
acquire additional property from time to time.
3. The Broker and its principal officers have extensive experience in
the sale and purchase of real estate assets.
4. The Broker is duly registered as a real estate broker, and is duly
qualified to procure the listing of real estate for sale, lease or rental, and
prospective purchasers, lessees, and
renters therefor, and has the good will of, and a reputation for dealing with,
the public, and also maintains an office, properly equipped and staffed,
suitable to serving as a real estate broker.
87
<PAGE> 2
5. In consideration for the non-exclusive opportunity offered hereby,
the Broker is willing to make an effort to sell any of the Trust's properties,
regardless of the size, quality or location of such properties.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties agree as follows:
1. PROPERTY SALES. The Trust shall make available to the Broker on a
non-exclusive basis information on real estate assets the Trust desires to sell
and Broker shall work diligently and with its best efforts to sell such real
estate.
2. PROPERTY ACQUISITIONS. Broker shall attempt to locate real estate
assets suitable for purchase by the Trust within the parameters set forth by the
Trust from time to time.
3. NO PARTNERSHIP OR JOINT VENTURE. The Trust and the Broker are not
partners or joint venturers with each other, and nothing herein shall be
construed so as to make them such partners or joint venturers or impose any
liability as such on either of them.
4. INDEPENDENT CONTRACTOR. The Broker will be performing professional
services for the Trust as an independent contractor and the Broker will not be
subject to the will and control of the Trust nor will the Trust have the right
to control either the method and the result of the services so performed. The
Trust will not be held responsible for the collection and payment of taxes or
contributions of any nature on behalf of the Broker including, but not by way
of limitation, contributions on behalf of the Broker for Federal Social
Security (F.I.C.A.) for Federal and State Unemployment Compensation, for State
Workman's Compensation Insurance, for State Real Estate Commission
Registration, for State, County and Municipal Occupational Licensing or
88
<PAGE> 3
for insurance, annuity, or retirement program in which the Broker may
participate.
5. BROKERAGE SERVICES. The Broker will perform professional services as
a Registered Real Estate Broker, and the Broker will devote sufficient time and
services on behalf of the Trust to accomplish the mutual purposes of the
parties.
6. HOLD HARMLESS. The Broker will hold the Trust harmless against all
suits, claims, and obligations which the Broker may incur in performing services
as an independent contractor, and the Broker shall have no right to bind,
contract, or obligate the Trust in the performance of services.
7. LEGAL COMPLIANCE. It is understood that the Broker will abide by all
laws, ethical practices and regulations promulgated by the applicable state real
estate commissions or other regulatory bodies.
8. PURCHASE COMMISSION. For locating and negotiating the lease or
purchase of any real property by the Trust, the Broker is to receive a purchase
commission in accordance with the fee schedule attached as Exhibit A to this
Agreement. The aggregate of each purchase price of each property (including the
purchase commission paid to the Broker and the Trust's advisor) may not exceed
such property's appraised value at acquisition. Any commission which is paid to
the Broker by the seller shall be credited against the commission to be paid by
the Trust hereunder.
9. REAL ESTATE SALES COMMISSION. For the sale of each property, the
Broker is to receive a real estate sales commission in accordance with the fee
schedule attached as Exhibit A to this Agreement.
10. EXPENSES OF THE BROKER. Without regard to the amount of compensation
received hereunder by the Broker, the Broker shall bear
89
<PAGE> 4
the following expenses:
(a) employment expenses of the personnel employed by the Broker,
including, but not limited to, fees, salaries, wages, payroll taxes, travel
expenses, and the cost of employee benefit plans and temporary help expenses;
(b) advertising and promotional expenses incurred in seeking investment
opportunities for the Trust;
(c) rent, telephone, utilities, office furniture and furnishings, and
other office expenses of the Broker; and
(d) miscellaneous administrative expenses relating to performance by
the Broker of its functions hereunder.
11. OTHER ACTIVITIES OF BROKER. Nothing herein contained shall prevent the
Broker or any of its officers, directors, or employees or any of its affiliates
from engaging in other business activities related to real estate investments or
from acting as broker to any other person or entity (including another real
estate investment trust), even though having investment policies similar to the
Trust, and the Broker and its officers, directors, or employees. The Broker
shall have a duty to present to the Trust any investment opportunity that comes
to the Broker or any of its affiliates if such opportunity is within the Trust's
investment policies.
12. TERM; TERMINATION OF AGREEMENT. This Agreement shall continue in force
for a period of twelve months, and thereafter it may be renewed from year to
year, subject to the approval of a majority of the Trustees of the Trust who are
not affiliated with the Broker. Notice of renewal shall be given in writing by
the Trustees to the Broker not less than 60 days before the expiration of this
Agreement or of any extension thereof. Notwithstanding any other
90
<PAGE> 5
provision to the contrary, this Agreement may be terminated for any reason
without penalty upon written notice by the Trust to the Broker or written
notice by the Broker to the Trust, in the former case by the vote of a majority
of the Trustees who are not affiliates of the Broker.
13. AMENDMENTS. This Agreement shall not be changed, modified, terminated
or discharged in whole or in part except by an instrument in writing signed by
both parties hereto, or their respective successors or assigns, or otherwise as
provided herein.
14. ASSIGNMENT. This Agreement shall not be assigned by the Broker
without the prior consent of the Trust. The Trust may terminate this Agreement
in the event of its assignment by the Broker without the prior consent of the
Trust. Such an assignment or any other assignment of this Agreement shall bind
the assignee hereunder in the same manner as the Broker is bound hereunder.
This Agreement shall not be assignable by the Trust without the consent of the
Broker, except in the case of assignment by the Trust to a corporation,
association, trust, or other organization that is a successor to the Trust.
Such successor shall be bound hereunder and by the terms of said assignment in
the same manner as the Trust is bound hereunder.
15. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Trustees, this
Agreement shall be and become terminated immediately upon written notice of
termination from the Trustees to the Broker if any of the following events
shall occur:
(a) If the Broker shall violate any provision of this Agreement, and
after notice of such violation shall not cure such default within 30 days; or
(b) If the Broker shall be adjudged bankrupt or insolvent by a court
of competent jurisdiction, or an order shall be made by a court of
91
<PAGE> 6
competent jurisdiction for the appointment of a receiver, liquidator, or
trustee of the Broker or of all or substantially all of its property by reason
of the foregoing, or approving any petition filed against the Broker for its
reorganization, and such adjudication or order shall remain in force or
unstayed for a period of 30 days; or
(c) If the Broker shall institute proceedings for voluntary bankruptcy
or shall file a petition seeking reorganization under the Federal bankruptcy
laws, or for relief under any law for the relief of debtors, or shall consent
to the appointment of a receiver of itself or of all or substantially all its
property, or shall make a general assignment for the benefit of its creditors,
or shall admit in writing its inability to pay its debts generally, as they
become due.
The Broker agrees that if any of the events specified in subsections (b)
and (c) of this Section shall occur, it will give written notice thereof to the
Trustees within seven days after the occurrence of such event.
16. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, pursuant to Sections 12, 14 or 15 hereof, the
Broker shall not be entitled to compensation for further services hereunder but
shall be paid all compensation earned to the date of termination.
17. MISCELLANEOUS. The Broker assumes no responsibility under this
Agreement other than to render the services called for hereunder in good
92
<PAGE> 7
faith, and shall not be responsible for any action of the Trust in following or
declining to follow any advice or recommendations of the Broker. Neither the
Broker nor any of its shareholders, directors, officers, or employees shall be
liable to the Trust, the Trustees, the holders of securities of the Trust or to
any successor or assign of the Trust except by reason of acts constituting bad
faith, willful misfeasance, gross negligence, or reckless disregard of their
duties.
18. NOTICES. Any notice, report, or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report, or other communication is accepted by the party to
whom it is given, and shall be given by being delivered at the following
addresses of the parties hereto:
The Trust:
Continental Mortgage and Equity Trust
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President
The Broker:
Carmel Realty, Inc.
10670 North Central Expressway
Suite 640
Dallas, Texas 75231
Attention: Chief Executive Officer
Either party may at any time give notice in writing to the other party of
a change of its address for the purpose of this Section.
19. HEADINGS. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.
20. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
Texas.
21. EXECUTION. This instrument is executed and made on behalf of the
Trust by an officer of the Trust, not individually but solely as an officer,
and the obligations under this Agreement are not binding upon,
93
<PAGE> 8
nor shall resort be had to the private property of, any of the Trustees,
shareholders, officers, employees, or agents of the Trust personally, but bind
only the Trust property.
IN WITNESS WHEREOF, CONTINENTAL MORTGAGE AND EQUITY TRUST and CARMEL
REALTY, INC., by their duly authorized officers, have signed these presents all
as of the day and year first above written.
CONTINENTAL MORTGAGE AND EQUITY TRUST
By: /s/ Randall M. Paulson
-------------------------
Randall M. Paulson
President
CARMEL REALTY, INC.
By: /s/ Bruce A. Endendyk
-------------------------
Bruce A. Endendyk
President
94
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,386
<SECURITIES> 4,753
<RECEIVABLES> 6,305
<ALLOWANCES> (7,005)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 205,269
<DEPRECIATION> 17,735
<TOTAL-ASSETS> 218,568
<CURRENT-LIABILITIES> 0
<BONDS> 135,590
<COMMON> 0
0
0
<OTHER-SE> 75,985
<TOTAL-LIABILITY-AND-EQUITY> 218,568
<SALES> 0
<TOTAL-REVENUES> 37,586
<CGS> 0
<TOTAL-COSTS> 22,682
<OTHER-EXPENSES> 4,279
<LOSS-PROVISION> 541
<INTEREST-EXPENSE> 10,009
<INCOME-PRETAX> (1,443)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,443)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
