<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
CONTINENTAL MORTGAGE AND EQUITY TRUST
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
PRELIMINARY STATEMENT FOR THE INFORMATION OF THE
SECURITIES AND EXCHANGE COMMISSION ONLY
CONTINENTAL MORTGAGE AND EQUITY TRUST
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of Continental Mortgage and Equity Trust:
PLEASE TAKE NOTICE that the Annual Meeting of Shareholders of Continental
Mortgage and Equity Trust (the "Trust") will be held at 10:00 a.m., Central
time, on Tuesday, April 22, 1997, at 10670 North Central Expressway, Suite 600,
Dallas, Texas 75231, to consider and vote on the following matters:
(1) the election of four Trustees of the Trust;
(2) the renewal of the Trust's current advisory agreement with Basic
Capital Management, Inc.; and
(3) the transaction of such other business as may properly come before
the annual meeting or any adjournments thereof.
Only Shareholders of record at the close of business on March 11, 1997,
will be entitled to vote at the Annual Meeting. Shareholders are cordially
invited to attend the Annual Meeting in person.
Regardless of whether you plan to be present at the Annual Meeting, please
promptly date, mark, sign, and mail the enclosed proxy ballot card to American
Stock Transfer and Trust Company in the envelope provided. Any Shareholder who
executes and delivers the enclosed proxy may revoke the authority granted
thereunder at any time prior to its use by giving written notice of such
revocation to American Stock Transfer and Trust Company, 40 Wall Street, 46th
Floor, New York, New York 10005, or by executing and delivering a proxy bearing
a later date. A Shareholder may also revoke a proxy by attending and voting at
the Annual Meeting. Your vote is important, regardless of the number of Shares
you own.
The Annual Report to Shareholders for the year ended December 31, 1995, has
been mailed to all Shareholders under separate cover.
Dated: March 12, 1997.
BY ORDER OF THE BOARD OF TRUSTEES
OF CONTINENTAL MORTGAGE AND EQUITY TRUST
/s/ THOMAS A. HOLLAND
Thomas A. Holland
Secretary
IMPORTANT
YOU CAN HELP THE TRUST AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP
LETTERS TO ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY BALLOT CARD.
IF YOU ARE UNABLE TO ATTEND THE ANNUAL MEETING, PLEASE MARK, DATE, SIGN AND
RETURN THE ENCLOSED PROXY BALLOT CARD SO THAT THE NECESSARY QUORUM MAY BE
REPRESENTED AT THE ANNUAL MEETING. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES.
FAILURE TO VOTE MAY SUBJECT THE TRUST TO FURTHER EXPENSE
If your Shares are held in the name of a brokerage firm, nominee or other
institution, only it can vote your Shares. Please contact promptly the person
responsible for your account and give instructions for your Shares to be voted.
<PAGE> 3
PRELIMINARY STATEMENT FOR THE INFORMATION OF THE
SECURITIES AND EXCHANGE COMMISSION ONLY
CONTINENTAL MORTGAGE AND EQUITY TRUST
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 22, 1997
GENERAL SHAREHOLDER INFORMATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Trustees of Continental Mortgage and Equity Trust (the "Trust") of
proxies to be used at the Annual Meeting of Shareholders for consideration of
and voting upon (1) the election of four Trustees, (2) the renewal of the
Trust's current advisory agreement with Basic Capital Management, Inc. ("BCM" or
the "Advisor"), and (3) the transaction of such other business as may properly
come before the meeting or any adjournments thereof.
The Annual Meeting will be held at 10:00 a.m., Central time, on Tuesday,
April 22, 1997, at 10670 North Central Expressway, Suite 600, Dallas, Texas
75231. The Trust's financial statements for the year ended December 31, 1995
were audited by BDO Seidman. A representative from BDO Seidman is expected to be
present at the Annual Meeting to respond to appropriate questions, and such
representative will have an opportunity to make a statement if such
representative desires to do so. This Proxy Statement and the accompanying proxy
are first being mailed to Shareholders on or about March 12, 1997.
SHAREHOLDERS ENTITLED TO VOTE
Only holders of record of issued and outstanding shares of beneficial
interest of the Trust (the "Shares") at the close of business on March 11, 1997
(the "Record Date"), are entitled to vote at the Annual Meeting and at any
adjournments thereof. At the close of business on March , 1997, there were
4,028,053 Shares outstanding. Each holder is entitled to one vote for each Share
held on the Record Date.
VOTING OF PROXIES
When the enclosed proxy is properly executed and returned, the Shares
represented thereby will be voted at the Annual Meeting in accordance with the
instructions noted thereon. As to the election of the four nominees as Trustees
(Proposal One), Shareholders may choose to vote for all of the nominees,
withhold authority for voting for all of the nominees or withhold authority for
voting for any individual nominee. As to the renewal of the Trust's current
advisory agreement with BCM (Proposal Two), Shareholders may choose to vote for,
against or abstain from voting on the proposal in its entirety.
In the absence of other instructions, the Shares represented by a properly
executed and submitted proxy will be voted in favor of the four nominees for
election to the Board of Trustees and in favor of Proposal Two. The Board of
Trustees does not know of any other business to be brought before the Annual
Meeting. If, however, any other matters properly come before the Annual Meeting,
it is the intention of the persons named in the enclosed proxy to vote such
proxy in accordance with their judgment on such matters.
EFFECTS OF AND REASONS FOR PROPOSAL TWO
In considering Proposal Two for the renewal of the Trust's current advisory
agreement with BCM, Shareholders should be aware that BCM will be entitled to
receive payments of certain fees from the Trust for
<PAGE> 4
the services it will perform. In addition, BCM serves as advisor to other
entities engaged in real estate investment activities that are similar to those
of the Trust and which may compete with the Trust in purchasing, selling,
leasing and financing real estate and related investments.
Section 4.4 of the Trust's Declaration of Trust provides that any contract
with the Advisor cannot have an initial term of more than two years and must
provide for annual renewal or extension thereafter, subject to approval by the
Shareholders of the Trust. BCM has been providing advisory services to the Trust
since March 1989. The current advisory agreement was executed as of December 1,
1992 and was approved by the Shareholders on April 26, 1993. Renewals of the
advisory agreement were approved by the Shareholders at the Annual Meetings of
Shareholders which were held on March 7, 1995 and on May 31, 1996.
The Board of Trustees believes that the terms of the advisory agreement
with BCM are at least as favorable to the Trust as those that would be obtained
from unaffiliated third parties.
VOTE REQUIRED FOR ELECTION OR APPROVAL
Pursuant to Section 6.7 of the Declaration of Trust, a majority of the
issued and outstanding Shares entitled to vote at a meeting of shareholders
represented in person or by proxy, shall constitute a quorum at such meeting.
Section 6.7 also provides that election of any Trustee requires the affirmative
vote of a majority of the votes cast at a meeting of Shareholders by holders of
Shares entitled to vote thereon. The renewal of the Trust's current advisory
agreement with BCM (Proposal Two), also requires the affirmative vote of a
majority of the votes cast at the Annual Meeting.
Abstentions will be included in vote totals and, as such, will have the
same effect on each proposal as a negative vote. Broker non-votes, if any, will
not be included in vote totals and, as such, will have no effect on any
proposal.
As of March , 1997, management and affiliates held 2,146,148 Shares
representing approximately [53.3%] of the Shares outstanding. Such parties
intend to vote 40% of the Shares for each of the proposals in accordance with
the recommendation of the Board of Trustees. The remaining 13.3% shall be voted
in proportion to the votes cast by all nonaffiliated Shareholders.
REVOCATION OF PROXIES
A proxy is enclosed herewith. Any Shareholder who executes and delivers the
proxy may revoke the authority granted thereunder at any time prior to its use
by giving written notice of such revocation to American Stock Transfer and Trust
Company, 40 Wall Street, 46th Floor, New York, New York 10005, or by executing
and delivering a proxy bearing a later date. A SHAREHOLDER MAY ALSO REVOKE A
PROXY BY ATTENDING AND VOTING AT THE ANNUAL MEETING.
FUTURE PROPOSALS OF SHAREHOLDERS (1996)
Any proposal intended to be presented by a Shareholder at the 1996 Annual
Meeting of Shareholders of the Trust must be received at the principal office of
the Trust not later than May 31, 1997, in order to be considered for inclusion
in the Trust's proxy statement and form of proxy (as the case may be) for that
meeting.
PROPOSAL ONE:
ELECTION OF TRUSTEES
NOMINEES
The following persons have been nominated to serve as Trustees of the
Trust: Ted P. Stokely, Edward L. Tixier, Martin L. White and Edward G. Zampa.
Each of the nominees is currently a Trustee of the Trust. Each of the
nominees has been nominated by the Board of Trustees to serve for an additional
term until the next Annual Meeting of Shareholders or until
2
<PAGE> 5
his successor shall have been duly elected and qualified. Each nominee has
consented to being named in this Proxy Statement as a nominee and has agreed to
serve as a Trustee if elected. When a proxy is properly executed and returned,
the Shares represented thereby will be voted in favor of the election of each of
the nominees, unless authority to vote for any such nominee is specifically
withheld. There will be no cumulative voting for the election of Trustees. If
any nominee is unable to serve or will not serve (an event which is not
anticipated), then the person acting pursuant to the authority granted under the
proxy will cast votes for the remaining nominees and, unless the Board of
Trustees takes action to reduce the number of Trustees, for such other person(s)
as he or she may select in place of such nominee(s).
The nominees are listed below, together with their ages, terms of service,
all positions and offices with the Trust or the Trust's advisor, BCM, other
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 of the Trust. The designation
"Independent", when used below with respect to a Trustee, means the Trustee is
neither an officer 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 below under "Certain Business
Relationships and Related Transactions".
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATIONS,
BUSINESS EXPERIENCE AND DIRECTORSHIPS AGE
------------------------------------- ---
<S> <C>
TED P. STOKELY: Trustee (Independent) (since April 1990) and 63
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, 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; Director
(since April 1990) and Chairman of the Board (since
January 1995) of Income Opportunity Realty Investors, Inc.
("IORI") and Transcontinental Realty Investors, Inc.
("TCI"); and Trustee (from April 1990 to August 1994) of
National Income Realty Trust ("NIRT").
EDWARD L. TIXIER Trustee (Independent) (since July 1996). 67
Director (since 1995) of Ryokachi Corporation, a Japanese
company; Cattle Rancher (since 1988); President (1988 to
1994) of Tixier, Inc., an Austin, Texas based corporation;
Senior Executive Advisor (1988 to 1994) to the President
of Regency International Trading Company, a Japanese
company; Commander (1984 to 1988) of U.S. Forces, Japan
and Commander, 5th Air Force; Retired (1988) Lt. General,
United States Air Force; and Director (since July 1996) of
IORI and TCI.
MARTIN L. WHITE: Trustee (Independent) (since January 1995). 57
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.
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATIONS,
BUSINESS EXPERIENCE AND DIRECTORSHIPS AGE
------------------------------------- ---
<S> <C>
EDWARD G. ZAMPA: Trustee (Independent) (since January 1995). 62
General Partner (since 1976) of Edward G. Zampa and
Company; and Director (since January 1995) of IORI and
TCI.
</TABLE>
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
EACH OF THE NOMINEES NAMED ABOVE.
BOARD COMMITTEES
The Trust's Board of Trustees held thirteen meetings in 1995 and twelve
meetings in 1996. For each such year, no incumbent Trustee attended fewer than
75% of the aggregate of (i) the total number of meetings held by the Board
during the period for which he had been a Trustee and (ii) the total number of
meetings held by all committees of the Board on which he served during the
periods that he served.
The 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. Stokely,
Tixier and White. The Audit Committee met twice during 1995 and twice during
1996.
The Trust's Board of Trustees has a Relationship with Advisor Committee
and, a Board Development Committee. The current members of the Relationship with
Advisor Committee are Messrs. Stokely 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 terms of any
engagement or compensation of the Advisor or its affiliates. The Relationship
with Advisor Committee met one time in 1995 and twice during 1996.
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 member of the Board Development Committee is Mr. White. The Board
Development Committee held no meetings in 1995 and two meetings in 1996.
The Trust's Board of Trustees does not have Nominating or Compensation
Committees.
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. 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 and 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 new
unaffiliated members to the Trust's Board of Trustees and set forth new
requirements for the approval of certain 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, 1995, 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 was $750,000.
4
<PAGE> 7
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 Board members that stand for reelection
during the two calendar years following the effective date of the Modification,
and (ii) voted in favor of all new Board members 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 financial
relationship with Mr. Phillips, Mr. Freidman, 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 retained jurisdiction to enforce the
Modification, and during August and September 1996, the Court held evidentiary
hearings to assess compliance with the terms of the Modification by various
parties. The Court issued no ruling or order with respect to the matters
addressed at the hearings.
Separately, in 1996, legal counsel for the plaintiffs notified the Trust's
Board of Trustees that he intends to assert that certain actions taken by the
Board of Trustees breached the terms of the Modification. On January 27, 1997,
the parties entered into an Amendment to the Modification of Stipulation of
Settlement, effective January 9, 1997 (the "Amendment"), which was submitted to
the Court for approval on January 29, 1997. The Amendment provides for the
settlement of all matters raised at the evidentiary hearings and by plaintiffs'
counsel in his notices to the Board of Trustees. As of March , 1997, the Court
had taken no action on the Amendment.
The Amendment provides 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 certain affiliates until April 28, 1999. In
addition, the Trust, TCI, IORI and their shareholders released the defendants
from any claims relating tot he plaintiffs' allegations and matters which were
the subject of the evidentiary hearings. The plaintiffs' allegations of any
breaches of the Modification shall be settled by mutual agreement of the parties
or, lacking such agreement, by an arbitration proceeding.
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<PAGE> 8
Under the Amendment, all shares of the Trust owned by Gene E. Phillips or
any of his affiliates shall be voted at all shareholders' meetings held until
April 28, 1999 in favor of all new Board members added under the Amendment. The
Amendment also requires that, until April 28, 1999, all shares of the Trust
owned by Gene E. Phillips or his affiliates in excess of forty percent (40%) of
the Trust's outstanding shares shall be voted in proportion to the votes cast by
all non-affiliated shareholders of the Trust.
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. The age,
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 of each executive officer are set
forth below.
<TABLE>
<CAPTION>
AGE
---
<S> <C>
RANDALL M. PAULSON: President (since August 1995) and 50
Executive Vice President (January 1995
to August 1995).
President (since August 1995) and Executive Vice President
(January 1995 to August 1995) of IORI, TCI and Syntek
Asset Management, Inc. ("SAMI") and (October 1994 to
August 1995) of BCM; 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.
BRUCE A. ENDENDYK: Executive Vice President (since January 48
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: Executive Vice President and Chief 54
Financial Officer (since August 1995);
Secretary (since February 1997) 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 SAMI,
BCM, ART, IORI and TCI; Secretary (since February 1997) of
IORI and TCI; Senior Vice President and Chief Accounting
Officer (July 1990 to February 1994) of NIRT and Vinland
Property Trust ("VPT"); Vice President and Controller of
Southmark (December 1986 to June 1990); Vice
President -- Finance of Diamond Shamrock Chemical Company
(January 1986 to December 1986); Assistant Controller of
Maxus Energy Corporation (formerly Diamond Shamrock
Corporation) (May 1976 to January 1986); Trustee of
Arlington Realty Investors (August 1989 to June 1990); and
Certified Public Accountant (since 1970).
</TABLE>
6
<PAGE> 9
OFFICERS
Although not executive officers of the Trust, the following persons
currently serve as officers of the Trust: Mark W. Branigan, Senior Vice
President -- Residential Asset Management; Lynn W. Humphries, Senior Vice
President -- Commercial Asset Management; Robert A. Waldman, Senior Vice
President and General Counsel; and Drew D. Potera, Vice President and Treasurer.
Their positions with the Trust are not subject to a vote of shareholders. Their
ages, terms of service, all positions and offices with the Trust or BCM, other
principal occupations, business experience and directorships with other
companies during the last five years or more are set forth below.
<TABLE>
<CAPTION>
AGE
---
<S> <C>
MARK W. BRANIGAN: Senior Vice President -- Residential Asset 42
Management (since December 1996) and Vice
President (February 1994 to December
1996).
Senior Vice President -- Residential Asset Management
(since December 1996) and Vice President (February 1994 to
December 1996) of SAMI, ART, IORI and TCI; Real Estate
Analyst (January 1992 to May 1994), Vice President (May
1994 to May 1995) and Executive Vice President (since May
1995) of BCM; Executive Vice President (1984 to 1991) of
Byron Investments, Inc.; Director (May 1989 to August
1990) and Manager (May 1981 to 1983) of Treasury Services
of Southmark; and Director (1977 to April 1981) of
Investor Relations for Syntek Corp.
LYNN W. HUMPHRIES: Senior Vice President -- Commercial Asset 46
Management (since May 1996).
Senior Vice President -- Commercial Asset Management
(since May 1996) of BCM, ART, TCI, IORI and SAMI; Vice
President (January 1994 to May 1996) of the Amend Group;
Vice President (1980 to 1993) of Equitable Real Estate
Investment Management, Inc.; and Senior Vice President
(1975 to 1980) of Sanders Campbell & Company.
ROBERT A. WALDMAN: Senior Vice President and General Counsel 44
(since January 1995), Vice President
(December 1990 to January 1995) and
Secretary (December 1993 to February
1997).
Senior Vice President and General Counsel (since January
1995), Vice President (December 1990 to January 1995) and
Secretary (December 1993 to February 1997) of IORI and
TCI; Vice President (December 1990 to February 1994) and
Secretary (December 1993 to February 1994) of NIRT and
VPT; 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; Director
(February 1987 to October 1989) and General Counsel and
Secretary (1985 to October 1989) of Red Eagle Resources
Corporation (oil and gas).
</TABLE>
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<PAGE> 10
<TABLE>
<CAPTION>
AGE
---
<S> <C>
DREW D. POTERA: Vice President (since December 1996) and 37
Treasurer (since December 1990).
Vice President (since December 1996) and Treasurer (since
December 1990) of IORI and TCI; Treasurer (December 1990
to February 1994) of NIRT and VPT; Vice President (since
December 1996), Treasurer (since August 1991), and
Assistant Treasurer (December 1990 to August 1991) of ART;
Vice President and Treasurer (since February 1992) of
SAMI; Vice President, Treasurer and Securities Manager
(since July 1990) of BCM; and Financial Consultant with
Merrill Lynch, Pierce, Fenner & Smith Incorporated (June
1985 to June 1990).
</TABLE>
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 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 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 Board of Trustees. The stated 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 Trust's 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 Gene E.
Phillips. Prior to December 22, 1989, Mr. Phillips served as a director of BCM,
and until September 1, 1992, Mr. Phillips served 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 May 31, 1996, 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 Advisory Agreement with BCM require the approval of the Trust's
shareholders.
See "The Advisory Agreement" below for a detailed discussion of the
advisory fees payable to BCM by the Trust.
PROPERTY MANAGEMENT
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 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
8
<PAGE> 11
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 seventeen
of the Trust's commercial properties and the industrial warehouses owned by one
of the real estate partnerships in which the Trust and NIRT are partners to
Carmel Realty, which is a company owned by SWI. Carmel Realty is entitled to
receive property and construction management fees and leasing commissions in
accordance with the terms of its property-level management agreement with
Carmel, Ltd.
REAL ESTATE BROKERAGE
Effective December 1, 1992, the Trust's Board of Trustees approved the
non-exclusive engagement of Carmel Realty to perform brokerage services for the
Trust. Carmel Realty is entitled to receive a commission for property
acquisitions and sales by the Trust in accordance with the following sliding
scale of total fees to be paid by the Trust: (i) maximum fee of 5% on the first
$2.0 million of any purchase or sale transaction of which no more than 4% would
be paid to Carmel Realty or affiliates; (ii) maximum fee of 4% on transaction
amounts between $2.0 million to $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 to $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.
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.
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.
Each Independent Trustee receives compensation in the amount of $15,000 per
year, plus reimbursement for expenses and the Chairman of the Board receives
$1,500 per year for serving in such position. In addition, each Independent
Trustee receives 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 (a Trustee until March 1996), $8,000; Harold
Furst, Ph.D. (a Trustee until August 1995), $15,000; John P. Parsons (a Trustee
until October 1996), $15,000; Bennett B. Sims (a Trustee until September 1996),
$7,300; Ted P. Stokely, $11,500; Martin L. White, $15,000; and Edward G. Zampa,
$15,000.
9
<PAGE> 12
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 CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD S&P 500 IN-
(FISCAL YEAR COVERED) THE TRUST DEX REIT INDEX
<S> <C> <C> <C>
1990 100 100 100
1991 184 131 139
1992 165 141 162
1993 356 155 197
1994 433 157 204
1995 436 215 251
</TABLE>
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 , 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
------------------- ----------------- ----------
<S> <C> <C>
American Realty Trust, Inc.
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231 1,633,819 40.6%
Basic Capital Management, Inc.
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231 512,329 12.7%
</TABLE>
- ---------------
(1) Percentage is based upon 4,028,053 shares of beneficial interest outstanding
at March , 1997.
10
<PAGE> 13
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 , 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
------------------------ ----------------- ----------
<S> <C> <C>
All Trustees and Executive 2,146,148(2) 53.3%
Officers as a group
(7 individuals)
</TABLE>
- ---------------
(1) Percentages are based upon 4,028,053 shares of beneficial interest issued
and outstanding at March , 1997.
(2) Includes 1,633,819 shares owned by ART and 512,329 shares owned by BCM of
which the executive officers of the Trust may be deemed to be beneficial
owners by virtue of their positions as executive officers or directors of
ART and BCM. The Trust's executive officers disclaim beneficial ownership of
such shares.
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 shares at a total cost to the Trust of
$5.0 million. The Trust purchased none of its shares of beneficial interest
during 1995.
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 Freidman 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. Freidman is no longer affiliated with the
shareholder group, and had disposed of any shares of the Trust which he or his
affiliates may have owned, the limitation should no longer apply to Mr. Friedman
or his affiliates. The Board of Trustees also determined that there was no
reason to object to the purchase of additional shares of the Trust by the
shareholder group and on August 23, 1994, the Trust's Board of Trustees adopted
a resolution to the effect that they do not object to the acquisition of up to
49% of the Trust's outstanding shares of beneficial interest by Mr. Phillips and
his affiliates. In determining total ownership, shares of beneficial interest of
the Trust, if any, owned by Mr. Freidman and his affiliates are no longer to be
included. Pursuant to this action Mr. Phillips and his affiliates could 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.
On March 21, 1996, the Board of Trustees reconsidered the share ownership
limitation and determined that there was no reason to object to the purchase by
the shareholder group 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 the shareholder
group.
CERTAIN BUSINESS RELATIONSHIPS
In February 1989, the Trust's Board of Trustees voted to retain BCM as the
Trust's advisor. BCM is a corporation of which Messrs. Paulson, Endendyk and
Holland serve as executive officers. Mr. Phillips served
11
<PAGE> 14
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, 1990, 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 seventeen
of the Trust's commercial properties and the industrial warehouses owned by one
of the real estate partnerships in which the Trust and NIRT are partners to
Carmel Realty, which is a company owned by SWI.
Prior to December 1, 1992, affiliates of BCM provided brokerage services to
the Trust and received brokerage commissions in accordance with the advisory
agreement. Since December 1, 1992, the Trust has engaged, on a non-exclusive
basis, Carmel Realty to perform brokerage services to the Trust. Carmel Realty
is a company owned by SWI.
The Trustees and officers of the Trust also serve as trustees or directors
and officers of 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 BCM. Eldercare
filed 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.
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 December
31, 1996 ART owned approximately 40.6% of the Trust's outstanding shares of
beneficial interest. At December 31, 1996, 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, 1996 the
market value of the ART shares was $5.3 million.
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 September 30, 1996, the Trust owned 84,580 shares of beneficial
interest of NIRT at a total cost of $415,000 all of which the Trust purchased in
open market transactions in 1990 and 1991. On November 8, 1996, the Trust's
Board of Trustees approved the sale of the NIRT shares to NIRT for $1.1 million.
Such sale was completed on December 17, 1996. On December 31, 1996, the Trust
owned 79,500 shares of TCI common stock at a total cost of $235,000, all of
which the Trust
12
<PAGE> 15
had purchased in open market transactions in 1990 and 1991. At December 31,
1996, the market value of the TCI common stock was $875,000.
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.
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 REFITS 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."
As discussed in "Related Party Transactions", above, since September 1990,
the Trust has invested in shares of various real estate entities. As of December
31, 1996, the Trust owned 409,044 shares of ART and 79,500 shares of TCI.
Trustees of the Trust serve as directors of TCI. The officers of the Trust serve
as officers of TCI. Messrs. Paulson, Endendyk and Holland are executive officers
of ART. BCM is advisor to each of ART and TCI, as well as to the Trust.
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
13
<PAGE> 16
officer, director or employee of the Trust's advisor, BCM, and was not an
officer or employee of the Trust. The Related Party Transaction Committee was
terminated by the Board of Trustees on January 11, 1995.
Pursuant to the terms of the Modification of Stipulation of Settlement in
the 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 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 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.
PROPOSAL TWO:
THE RENEWAL OF THE ADVISORY AGREEMENT
The Board of Trustees recommends that Shareholders approve the renewal
through the next annual meeting of shareholders of the current advisory
agreement described below between the Trust and BCM. A copy of the Advisory
Agreement appears as Appendix A to this Proxy Statement and is described below
under "The Advisory Agreement". The affirmative vote of a majority of the votes
cast at the Annual Meeting is required to approve the renewal of the Advisory
Agreement.
If Shareholders approve this Proposal Two, the Advisory Agreement will have
a term extending through the next annual meeting of Shareholders, and any
renewal of the Advisory Agreement thereafter will be subject to Shareholder
approval in accordance with the provisions of the Declaration of Trust.
THE ADVISORY AGREEMENT
BCM has served as advisor to the Trust since March 28, 1989. The current
Advisory Agreement was entered into effective December 1, 1992, and was approved
by the shareholders at the Trust's annual meeting of shareholders held on April
26, 1993. The shareholders approved the renewal of the Advisory Agreement at the
Trust's annual meetings of shareholders held on March 7, 1995 and May 31, 1996.
Under the Advisory Agreement, the Advisor is required to formulate and
submit annually for approval by the Trust's Board of Trustees a budget and
business plan for the Trust containing a twelve-month forecast of operations and
cash flow, a general plan for asset sales or acquisitions, lending, foreclosure
and borrowing activity, and other investments, and the Advisor is required to
report quarterly to the Trust's Board of Trustees on the Trust's performance
against the business plan. In addition, all transactions or investments by the
Trust shall require prior approval by the Trust's Board of Trustees unless they
are explicitly provided for in the approved business plan or are made pursuant
to authority expressly delegated to the Advisor by the Trust's Board of
Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides that the Advisor shall
be deemed to be in a fiduciary relationship to the Trust's shareholders;
contains a broad standard governing the Advisor's liability for losses by the
Trust; and contains guidelines for the Advisor's allocation of investment
opportunities as among itself, the Trust and other entities it advises.
14
<PAGE> 17
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 (i) 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 (ii) 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 purchase price of each property
(including acquisition commissions and all real estate brokerage fees) may not
exceed such property's appraised value at acquisition.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the
Trust one-half of any compensation received from third parties with respect to
the origination, placement or brokerage of any loan made by the Trust, provided,
however, that the compensation retained by BCM or any affiliate of BCM shall not
exceed the lesser of (i) 2% of the amount of the loan committed by the Trust or
(ii) a loan brokerage and commitment fee which is reasonable and fair under the
circumstances.
The Advisory Agreement also provides that BCM or an affiliate of BCM is to
receive a mortgage or loan acquisition fee with respect to the acquisition or
purchase of any existing mortgage loan by the Trust equal to the lesser of (i)
1% of the amount of the loan purchased or (ii) a loan brokerage or commitment
fee which is reasonable and fair under the circumstances. Such fee will not be
paid in connection with the origination or funding by the Trust of any mortgage
loan.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive
a mortgage brokerage and equity refinancing fee for obtaining loans to the Trust
or refinancing on Trust properties equal to the lesser of (i) 1% of the amount
of the loan or the amount refinanced or (ii) a brokerage or refinancing fee
which is reasonable and fair under the circumstances; provided, however, that no
such fee shall be paid on loans from BCM or an affiliate of BCM without the
approval of the Trust's Board of Trustees. No fee shall be paid on loan
extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of certain
expenses incurred by it, in the performance of advisory services to the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of
Trust), all or a portion of the annual advisory fee must be refunded by the
Advisor to the Trust if the Operating Expenses of the Trust (as defined in the
Trust's Declaration of Trust) exceed certain limits specified in the Declaration
of Trust based on the book value, net asset 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 1993 or 1994.
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
15
<PAGE> 18
services on terms to be agreed upon from time to time. The Trust has hired
Carmel, Ltd., an affiliate of BCM, to provide property management for the
Trust's properties and, the Trust has engaged Carmel Realty, also an affiliate
of BCM, on a non-exclusive basis, to provide 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.
<TABLE>
<S> <C>
MICKEY N. PHILLIPS: Director
RYAN T. PHILLIPS: Director
RANDALL M. PAULSON: President
MARK W. BRANIGAN: Executive Vice President -- Residential Asset
Management
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
DAN S. ALLRED: Senior Vice President -- Land Development
LYNN W. HUMPHRIES: Senior Vice President -- Commercial Asset
Management
ROBERT A. WALDMAN: Senior Vice President, Secretary and General
Counsel
DREW D. POTERA: Vice President, Treasurer and Securities Manager
</TABLE>
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.
The Board of Trustees recommends that Shareholders approve the renewal of
the Trust's current Advisory Agreement with BCM because the terms of such
agreement are, in its view, as favorable to the Trust as those that would be
obtained from unaffiliated third parties for the performance of similar
services, while at the same time the Advisory Agreement gives BCM adequate
incentive to improve the performance of the Trust's properties and mortgages.
SELECTION OF AUDITORS FOR 1996
The Board of Trustees has selected BDO Seidman to serve as the auditors for
the Trust for the 1996 fiscal year. The Trust's auditors for the 1995 fiscal
year were BDO Seidman. A representative of BDO Seidman is expected to attend the
annual meeting.
OTHER MATTERS
Management knows of no other matters that may properly be, or that are
likely to be, brought before the meeting. However, if any other matters are
properly brought before the meeting, the persons named in the enclosed proxy or
their substitutes will vote in accordance with their best judgment on such
matters.
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED ON
As described herein, the executive officers of the Trust also serve as
executive officers of, and are employed by, BCM. Such executive officers could
therefore be deemed to benefit financially from shareholder approval of the
renewal of the Trust's Advisory Agreement with BCM pursuant to Proposal Two.
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FINANCIAL STATEMENTS
The audited financial statements of the Trust, in comparative form for the
years ended December 31, 1995, 1994 and 1993 are contained in the 1995 Annual
Report to Shareholders. However, such report and the financial statements
contained therein are not to be considered part of this solicitation.
SOLICITATION OF PROXIES
THIS PROXY STATEMENT IS FURNISHED TO SHAREHOLDERS TO SOLICIT PROXIES ON
BEHALF OF THE TRUSTEES OF THE TRUST. The cost of soliciting proxies will be
borne by the Trust. Trustees and officers of the Trust may, without additional
compensation, solicit by mail, in person or by telecommunication. In addition,
the Trust has retained Shareholder Communications Corporation ("SCC") to assist
in the solicitation of proxies. An agreement with SCC provides that it will
distribute materials relating to the solicitation of proxies, contact
Shareholders to confirm receipt of materials and answer questions relating
thereto. SCC is to be paid a base fee of $2,000 plus out-of-pocket expenses and
is to be indemnified against certain liability incurred as a result of the
provisions of such services.
------------------------
COPIES OF THE TRUST'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31,
1995 TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K ARE AVAILABLE TO
SHAREHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO CONTINENTAL MORTGAGE AND
EQUITY TRUST, 10670 NORTH CENTRAL EXPRESSWAY, SUITE 300, DALLAS, TEXAS 75231,
ATTENTION: DIRECTOR OF INVESTOR RELATIONS.
By Order of the Board of Trustees
Randall M. Paulson
President
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS THAT YOU VOTE FOR ALL FOUR OF
THE NOMINEES AND THAT YOU VOTE FOR THE APPROVAL OF THE RENEWAL OF THE CURRENT
ADVISORY AGREEMENT BY VOTING FOR PROPOSAL TWO ON THE ENCLOSED PROXY. REGARDLESS
OF HOW YOU WISH TO VOTE YOUR SHARES, YOUR BOARD OF TRUSTEES URGES YOU TO
PROMPTLY SIGN, DATE AND MAIL THE ENCLOSED PROXY.
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APPENDIX A
ADVISORY AGREEMENT
BETWEEN
CONTINENTAL MORTGAGE AND EQUITY TRUST
AND
BASIC CAPITAL MANAGEMENT, INC.
THIS AGREEMENT dated as of March 7, 1995, between Continental Mortgage and
Equity Trust, a California real estate investment trust (the "Trust") and Basic
Capital Management, Inc., a Nevada corporation (the "Advisor").
WITNESSETH:
WHEREAS:
1. The Trust owns a complex, diversified portfolio of real estate,
mortgages and other assets, including many non-performing or troubled assets.
2. The Trust is an active real estate investment trust with funds available
for investment primarily in the acquisition of income-producing real estate and
to a lesser extent in short and medium term mortgages.
3. The Advisor and its employees have extensive experience in the
administration of real estate assets and the origination, structuring and
evaluation of real estate and mortgage investments.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties agree as follows:
1. Duties of the Advisor. Subject to the supervision of the Board of
Trustees, the Advisor will be responsible for the day-to-day operations of the
Trust and, subject to Section 17 hereof, shall provide such services and
activities relating to the assets, operations and business plan of the Trust as
may be appropriate, including:
(a) preparing and submitting an annual budget and business plan for
approval by the Board of the Trust (the "Business Plan");
(b) using its best efforts to present to the Trust a continuing and
suitable investment program consistent with the investment policies and
objectives of the Trust as set forth in the Business Plan;
(c) using its best efforts to present to the Trust investment
opportunities consistent with the Business Plan and such investment program
as the Trustees may adopt from time to time;
(d) furnishing or obtaining and supervising the performance of the
ministerial functions in connection with the administration of the
day-to-day operations of the Trust, including the investment of reserve
funds and surplus cash in short-term money market investments;
(e) serving as the Trust's investment and financial advisor and
providing research, economic, and statistical data in connection with the
Trust's investments and investment and financial policies;
(f) on behalf of the Trust, investigating, selecting and conducting
relations with borrowers, lenders, mortgagors, brokers, investors,
builders, developers and others; provided however, that the Advisor shall
not retain on the Trust's behalf any consultants or third party
professionals, other than legal counsel, without prior Board approval;
(g) consulting with the Trustees and furnishing the Trustees with
advice and recommendations with respect to the making, acquiring (by
purchase, investment, exchange, or otherwise), holding, and
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disposition (through sale, exchange, or otherwise) of investments
consistent with the Business Plan of the Trust;
(h) obtaining for the Trustees such services as may be required in
acquiring and disposing of investments, disbursing and collecting the funds
of the Trust, paying the debts and fulfilling the obligations of the Trust,
and handling, prosecuting, and settling any claims of the Trust, including
foreclosing and otherwise enforcing mortgage and other liens securing
investments;
(i) obtaining for and at the expense of the Trust such services as may
be required for property management, loan disbursements, and other
activities relating to the investments of the Trust, provided, however, the
compensation for such services shall be agreed to by the Trust and the
service provider;
(j) advising the Trust in connection with public or private sales of
shares or other securities of the Trust, or loans to the Trust, but in no
event in such a way that the Advisor could be deemed to be acting as a
broker dealer or underwriter;
(k) quarterly and at any time requested by the Trustees, making
reports to the Trustees regarding the Trust's performance to date in
relation to the Trust's approved Business Plan and its various components,
as well as the Advisor's performance of the foregoing services;
(l) making or providing appraisal reports, where appropriate, on
investments or contemplated investments of the Trust;
(m) assisting in preparation of reports and other documents necessary
to satisfy the reporting and other requirements of any governmental bodies
or agencies and to maintain effective communications with shareholders of
the Trust; and
(n) doing all things necessary to ensure its ability to render the
services contemplated herein, including providing office space and office
furnishings and personnel necessary for the performance of the foregoing
services as Advisor, all at its own expense, except as otherwise expressly
provided for herein.
2. No Partnership or Joint Venture. The Trust and the Advisor are not
partners or joint venturers with each other, and nothing herein shall be
construed so as to make them such partners or joint venturers or impose any
liability as such on either of them.
3. Records. At all times, the Advisor shall keep proper books of account
and records of the Trust's affairs which shall be accessible for inspection by
the Trust at any time during ordinary business hours.
4. Additional Obligations of the Advisor. The Advisor shall refrain from
any action (including, without limitation, furnishing or rendering services to
tenants of property or managing or operating real property) that would (a)
adversely affect the status of the Trust as a real estate investment trust, as
defined and limited in Sections 856-860 of the Internal Revenue Code, (b)
violate any law, rule, regulation, or statement of policy of any governmental
body or agency having jurisdiction over the Trust or over its securities, (c)
cause the Trust to be required to register as an investment company under the
Investment Company Act of 1940, or (d) otherwise not be permitted by the
Declaration of Trust of the Trust.
5. Bank Accounts. The Advisor may establish and maintain one or more bank
accounts in its own name, and may collect and deposit into any such account or
accounts, and disburse from any such account or accounts, any money on behalf of
the Trust, under such terms and conditions as the Trustees may approve, provided
that no funds in any such account shall be commingled with funds of the Advisor;
and the Advisor shall from time to time render appropriate accounting of such
collections and payments to the Trustees and to the auditors of the Trust.
6. Bond. The Advisor shall maintain a fidelity bond with a responsible
surety company in such amount as may be required by the Trustees from time to
time, covering all directors, officers, employees, and agents of the Advisor
handling funds of the Trust and any investment documents or records pertaining
to investments of the Trust. Such bond shall inure to the benefit of the Trust
in respect to losses of any such property from acts of such directors, officers,
employees, and agents through theft, embezzlement, fraud, negligence, error, or
omission or otherwise, the premium for said bond to be at the expense of the
Trust.
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7. Information Furnished Advisor. The Trustees shall have the right to
change the Business Plan at any time, effective upon receipt by the Advisor of
notice of such change. The Trust shall furnish the Advisor with a certified copy
of all financial statements, a signed copy of each report prepared by
independent certified public accountants, and such other information with regard
to the Trust's affairs as the Advisor may from time to time reasonably request.
8. Consultation and Advice. In addition to the services described above,
the Advisor shall consult with the Trustees, and shall, at the request of the
Trustees or the officers of the Trust, furnish advice and recommendations with
respect to any aspect of the business and affairs of the Trust, including any
factors that in the Advisor's best judgment should influence the policies of the
Trust.
9. Annual Business Plan and Budget. No later than January 15th of each
year, the Advisor shall submit to the Trustees a written Business Plan for the
current Fiscal Year of the Trust. Such Business Plan shall include a
twelve-month forecast of operations and cash flow with explicit assumptions and
a general plan for asset sales or acquisitions, lending, foreclosure and
borrowing activity, other investments or ventures and proposed securities
offerings or repurchases or any proposed restructuring of the Trust. To the
extent possible, the Business Plan shall set forth the Advisor's recommendations
and the basis therefor with respect to all material investments of the Trust.
Upon approval by the Board of Trustees, the Advisor shall be authorized to
conduct the business of the Trust in accordance with the explicit provisions of
the Business Plan, specifically including the borrowing, leasing, maintenance,
capital improvements, renovations and sale of investments set forth in the
Business Plan. Any transaction or investment not explicitly provided for in the
approved Business Plan shall require the prior approval of the Board of Trustees
unless made pursuant to authority expressly delegated to the Advisor. Within
sixty (60) days of the end of each calendar quarter, the Advisor shall provide
the Board of Trustees with a report comparing the Trust's actual performance for
such quarter against the Business Plan.
10. Definitions. As used herein, the following terms shall have the
meanings set forth below:
(a) "Affiliate" shall mean, as to any Person, any other Person who
owns beneficially, directly, or indirectly, 1% or more of the outstanding
capital stock, shares or equity interests of such Person or of any other
Person which controls, is controlled by, or is under common control with
such Person or is an officer, retired officer, director, employee, partner,
or trustee (excluding non-interested trustees not otherwise affiliated with
the entity) of such Person or of any other Person which controls, is
controlled by, or is under common control with, such Person.
(b) "Appraised Value" shall mean the value of a Real Property
according to an appraisal made by an independent qualified appraiser who is
a member in good standing of the American Institute of Real Estate
Appraisers and is duly licensed to perform such services in accordance with
the applicable state law, or, when pertaining to Mortgage Loans, the value
of the underlying property as determined by the Advisor.
(c) "Book Value" of an asset or assets shall mean the value of such
asset or assets on the books of the Trust, before provision for
amortization, depreciation, depletion or valuation reserves and before
deducting any indebtedness or other liability in respect thereof, except
that no asset shall be valued at more than its fair market value as
determined by the Trustees.
(d) "Book Value of Invested Assets" shall mean the Book Value of the
Trust's total assets (without deduction of any liabilities), but excluding
(i) goodwill and other intangible assets, (ii) cash, and (iii) cash
equivalent investments with terms which mature in one year or less.
(e) "Business Plan" shall mean the Trust's investment policies and
objectives and the capital and operating budget based thereon, approved by
the Board as thereafter modified or amended.
(f) "Fiscal Year" shall mean any period for which an income tax return
is submitted to the Internal Revenue Service and which is treated by the
Internal Revenue Service as a reporting period.
(g) "Gross Asset Value" shall mean the total assets of the Trust after
deduction of allowance for amortization, depreciation or depletion and
valuation reserves.
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(h) "Mortgage Loans" shall mean notes, debentures, bonds, and other
evidences of indebtedness or obligations, whether negotiable or
non-negotiable, and which are secured or collateralized by mortgages,
including first, wraparound, construction and development, and junior
mortgages.
(i) "Net Asset Value" shall mean the Book Value of all the assets of
the Trust minus all the liabilities of the Trust.
(j) "Net Income" for any period shall mean the Net Income of the Trust
for such period computed in accordance with generally accepted accounting
principles after deduction of the Gross Asset Fee, but before deduction of
the Net Income Fee, as set forth in Sections 11(a) and 11(b), respectively,
herein, and inclusive of gain or loss of the sale of assets.
(k) "Net Operating Income" shall mean rental income less property
operating expenses.
(l) "Person" shall mean and include individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
joint ventures, associations, companies, trusts, banks, trust companies,
land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof.
(m) "Real Property" shall mean and include land, rights in land,
leasehold interests (including but not limited to interests of a lessor or
lessee therein), and any buildings, structures, improvements, fixtures, and
equipment located on or used in connection with land, leasehold interests,
and rights in land or interests therein.
All calculations made pursuant to this Agreement shall be based on
statements (which may be unaudited, except as provided herein) prepared on an
accrual basis consistent with generally accepted accounting principles,
regardless of whether the Trust may also prepare statements on a different
basis. All other terms shall have the same meaning as set forth in the Trust's
Declaration of Trust and Trustees' Regulations.
11. Advisory Compensation.
(a) Gross Asset Fee. On or before the twenty-eighth day of each month
during the term hereof the Trust shall pay to the Advisor, as compensation for
the basic management and advisory services rendered to the Trust hereunder, a
fee at the rate of .0625% per month of the average of the Gross Asset Value of
the Trust at the beginning and at the end of the next preceding calendar month.
Without negating the provisions of Sections 18, 19, 22 and 23 hereof, the annual
rate of the Gross Asset Fee shall be .75% per annum.
(b) Net Income Fee. As an incentive for successful investment and
management of the Trust's assets, the Advisor will be entitled to receive a fee
equal to 7.5% per annum of the Trust's Net Income for each Fiscal Year or
portion thereof for which the Advisor provides services. To the extent the Trust
has Net Income in a quarter, the 7.5% Net Income Fee is to be paid quarterly on
or after the third business day following the filing of the report on Form 10-Q
with the Securities and Exchange Commission, except for the payment for the
fourth quarter, ended December 31, which is to be paid on or after the third
business day following the filing of the report on Form 10-K with the Securities
and Exchange Commission. The 7.5% Net Income Fee is to be cumulative within any
Fiscal Year, such that if the Trust has a loss in any quarter during the Fiscal
Year, each subsequent quarter's payment shall be adjusted to maintain the 7.5%
per annum rate, with final settlement being made with the fourth quarter payment
and in accordance with audited results for the Fiscal Year. The 7.5% Net Income
Fee is not cumulative from year to year.
(c) Acquisition Commission. For supervising the acquisition, purchase or
long term lease of Real Property for the Trust, the Advisor is to receive an
Acquisition Commission equal to the lesser of (i) up to 1% of the cost of
acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers; or
(ii) the compensation customarily charged in arm's-length transactions by others
rendering similar property acquisition services as an ongoing public activity in
the same geographical location and for comparable property. The aggregate of
each purchase price of each property (including the Acquisition Commissions and
all real estate brokerage fees) may not exceed such property's Appraised Value
at acquisition.
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(d) Incentive Sales Compensation. To encourage periodic sales of
appreciated Real Property at optimum value and to reward the Advisor for
improved performance of the Trust's Real Property, the Trust shall pay to the
Advisor, on or before the 45th day after the close of each Fiscal Year, an
incentive fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all Real Property sold by the Trust during such Fiscal Year
exceeds the sum of: (i) the cost of each such Real Property as originally
recorded in the Trust's books for tax purposes (without deduction for
depreciation, amortization or reserve for losses), (ii) capital improvements
made to such assets during the period owned by the Trust, and (iii) all closing
costs, (including real estate commissions) incurred in the sale of such Real
Property; provided, however, no incentive fee shall be paid unless (a) such Real
Property sold in such Fiscal Year, in the aggregate, has produced an 8% simple
annual return on the Trust's net investment including capital improvements,
calculated over the Trust's holding period before depreciation and inclusive of
operating income and sales consideration and (b) the aggregate Net Operating
Income from all Real Property owned by the Trust for all of the prior Fiscal
Year and the current Fiscal Year shall be at least 5% higher in the current
Fiscal Year than in the prior Fiscal Year.
(e) Mortgage or Loan Acquisition Fees. For the acquisition or purchase from
an unaffiliated party of any existing mortgage or loan by the Trust, the Advisor
or an Affiliate is to receive a Mortgage or Loan Acquisition Fee equal to the
lesser of (a) 1% of the amount of the mortgage or loan purchased by the Trust or
(b) a brokerage or commitment fee which is reasonable and fair under the
circumstances. Such fee will not be paid in connection with the origination or
funding by the Trust of any mortgage loan.
(f) Mortgage Brokerage and Equity Refinancing Fees. For obtaining loans to
the Trust or refinancing on Trust properties, the Advisor or an Affiliate is to
receive a Mortgage Brokerage and Equity Refinancing Fee equal to the lesser of
(a) 1% of the amount of the loan or the amount refinanced or (b) a brokerage or
refinancing fee which is reasonable and fair under the circumstances; provided,
however that no such fee shall be paid on loans from the Advisor or an Affiliate
without the approval of the Board of Trustees. No fee shall be paid on loan
extensions.
12. Limitation on Third Party Mortgage Placement Fees. The Advisor or any
of its Affiliates shall pay to the Trust, one-half of any compensation received
by the Advisor or any such Affiliate from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust, provided,
however, the compensation retained by the Advisor or Affiliate shall not exceed
the lesser of (a) 2% of the amount of the loan committed by the Trust or (b) a
loan brokerage and commitment fee which is reasonable and fair under the
circumstances.
13. Statements. The Advisor shall furnish to the Trust not later than the
tenth day of each calendar month, beginning with the second calendar month of
the term of this Agreement, a statement showing the computation of the fees, if
any, payable in respect to the next preceding calendar month (or, in the case of
incentive compensation, for the preceding Fiscal Year, as appropriate) under the
Agreement. The final settlement of incentive compensation for each Fiscal Year
shall be subject to adjustment in accordance with, and upon completion of, the
annual audit of the Trust's financial statements; any payment by the Trust or
repayment by the Advisor that shall be indicated to be necessary in accordance
therewith shall be made promptly after the completion of such audit and shall be
reflected in the audited statements to be published by the Trust.
14. Compensation for Additional Services. If and to the extent that the
Trust shall request the Advisor or any director, officer, partner, or employee
of the Advisor to render services for the Trust other than those required to be
rendered by the Advisor hereunder, such additional services, if performed, will
be compensated separately on terms to be agreed upon between such party and the
Trust from time to time. In particular, but without limitation, if the Trust
shall request that the Advisor perform property management, leasing, loan
disbursement or similar functions, the Trust and the Advisor shall enter into a
separate agreement specifying the obligations of the parties and providing for
reasonable additional compensation to the Advisor for performing such services.
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15. Expenses of the Advisor. Without regard to the amount of compensation
or reimbursement received hereunder by the Advisor, the Advisor shall bear the
following expenses:
(a) employment expenses of the personnel employed by the Advisor
(including Trustees, officers, and employees of the Trust who are
directors, officers, or employees of the Advisor or of any company that
controls, is controlled by, or is under common control with the Advisor),
including, but not limited to, fees, salaries, wages, payroll taxes, travel
expenses, and the cost of employee benefit plans and temporary help
expenses except for those personnel expenses described in Sections 16(e)
and (p);
(b) advertising and promotional expenses incurred in seeking
investments for the Trust;
(c) rent, telephone, utilities, office furniture and furnishings, and
other office expenses of the Advisor and the Trust, except as any of such
expenses relates to an office maintained by the Trust separate from the
office of the Advisor; and
(d) miscellaneous administrative expenses relating to performance by
the Advisor of its functions hereunder.
16. Expenses of the Trust. The Trust shall pay all of its expenses not
assumed by the Advisor, including without limitation, the following expenses:
(a) the cost of money borrowed by the Trust;
(b) income taxes, taxes and assessments on real property, and all
other taxes applicable to the Trust;
(c) legal, auditing, accounting, underwriting, brokerage, listing,
registration and other fees, printing, and engraving and other expenses,
and taxes incurred in connection with the issuance, distribution, transfer,
registration, and stock exchange listing of the Trust's securities;
(d) fees, salaries, and expenses paid to officers, and employees of
the Trust who are not directors, officers or employees of the Advisor, or
of any company that controls, is controlled by, or is under common control
with the Advisor;
(e) expenses directly connected with the origination or purchase of
Mortgage Loans and with the acquisition, disposition, and ownership of real
estate equity interests or other property (including the costs of
foreclosure, insurance, legal, protective, brokerage, maintenance, repair,
and property improvement services) and including all compensation,
traveling expenses, and other direct costs associated with the Advisor's
employees or other personnel engaged in (i) real estate transaction legal
services, (ii) internal auditing, (iii) foreclosure and other mortgage
finance services, (iv) sale or solicitation for sale of mortgages, (v)
engineering and appraisal services, and (vi) transfer agent services;
(f) expenses of maintaining and managing real estate equity interests;
(g) insurance, as required by the Trustees (including Trustees'
liability insurance);
(h) the expenses of organizing, revising, amending, converting,
modifying, or terminating the Trust;
(i) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the
Trustees to holders of securities of the Trust;
(j) all expenses connected with communications to holders of
securities of the Trust and the other bookkeeping and clerical work
necessary in maintaining relations with holders of securities, including
the cost of printing and mailing certificates for securities and proxy
solicitation materials and reports to holders of the Trust's securities;
(k) the cost of any accounting, statistical, bookkeeping or computer
equipment or computer time necessary for maintaining the books and records
of the Trust and for preparing and filing Federal, State and Local tax
returns;
(l) transfer agent's, registrar's, and indenture trustee's fees and
charges;
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(m) legal, accounting, investment banking, and auditing fees and
expenses charged by independent parties performing these services not
otherwise included in clauses (c) and (e) of this Section 16;
(n) expenses incurred by the Advisor, arising from the sales of Trust
properties, including those expenses related to carrying out foreclosure
proceedings;
(o) commercially reasonable fees paid to the Advisor for efforts to
liquidate mortgages before maturity, such as the solicitation of offers and
negotiation of terms of sale;
(p) costs and expenses connected with computer services, including but
not limited to employee or other personnel compensation, hardware and
software costs, and related development and installation costs associated
therewith;
(q) costs and expenses associated with risk management (i.e. insurance
relating to the Trust's assets);
(r) loan refinancing compensation; and
(s) expenses associated with special services requested by the
Trustees pursuant to Section 14 hereof.
17. Other Activities of Advisor. The Advisor, its officers, directors, or
employees or any of its Affiliates may engage in other business activities
related to real estate investments or act as advisor to any other person or
entity (including another real estate investment trust), including those with
investment policies similar to the Trust, and the Advisor and its officers,
directors, or employees and any of its Affiliates shall be free from any
obligation to present to the Trust any particular investment opportunity that
comes to the Advisor or such persons, regardless of whether such opportunity is
in accordance with the Trust's Business Plan. However, to minimize any possible
conflict, the Advisor shall consider the respective investment objectives of,
and the appropriateness of a particular investment to each such entity in
determining to which entity a particular investment opportunity should be
presented. If appropriate to more than one entity, the Advisor shall present the
investment opportunity to the entity that has had sufficient uninvested funds
for the longest period of time.
18. Limitation on Operating Expenses. To the extent that the operating
expenses of the Trust for any Fiscal Year exceeds the limitation set forth in
the Trust's Declaration of Trust as amended from time to time, or any similar
limitation (if contained) in a successor Declaration of Trust or Certificate of
Incorporation, the Advisor shall refund to the Trust such portion of its fees
payable hereunder as may be required by such Section.
19. Term; Termination of Agreement. This Agreement shall continue in force
until the next Annual Meeting of Shareholders of the Trust, and, thereafter, it
may be renewed from year to year, subject to any required approval of the
Shareholders of the Trust and, if any Trustee is an Affiliate of the Advisor,
the approval of a majority of the Trustees who are not so affiliated. Notice of
renewal shall be given in writing by the Trustees to the Advisor not less than
60 days before the expiration of this Agreement or of any extension thereof.
This Agreement may be terminated for any reason without penalty upon 60 days'
written notice by the Trust to the Advisor or 120 days' written notice by the
Advisor to the Trust, in the former case by the vote of a majority of the
Trustees who are not Affiliates of the Advisor or by the vote of holders of a
majority of the outstanding shares of the Trust. Notwithstanding the foregoing,
however, in the event of any material change in the ownership, control or
management of the Advisor, the Trust may terminate this Agreement without
penalty and without advance notice to the Advisor.
20. Amendments. This Agreement shall not be changed, modified, terminated
or discharged in whole or in part except by an instrument in writing signed by
both parties hereto, or their respective successors or assigns, or otherwise as
provided herein.
21. Assignment. This Agreement shall not be assigned by the Advisor without
the prior consent of the Trust. The Trust may terminate this Agreement in the
event of its assignment by the Advisor without the prior consent of the Trust.
Such an assignment or any other assignment of this Agreement by the Advisor
shall bind the assignee hereunder in the same manner as the Advisor is bound
hereunder. This Agreement shall not be
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assignable by the Trust without the consent of the Advisor, except in the case
of assignment by the Trust to a corporation, association, trust, or other
organization that is a successor to the Trust. Such successor shall be bound
hereunder and by the terms of said assignment in the same manner as the Trust is
bound hereunder.
22. Default, Bankruptcy, etc. At the option solely of the Trustees, this
Agreement shall be and become terminated immediately upon written notice of
termination from the Trustees to the Advisor if any of the following events
shall occur:
(a) If the Advisor shall violate any provision of this Agreement, and
after notice of such violation shall not cure such default within 30 days;
or
(b) If the Advisor shall be adjudged bankrupt or insolvent by a court
of competent jurisdiction, or an order shall be made by a court of
competent jurisdiction for the appointment of a receiver, liquidator, or
trustee of the Advisor or of all or substantially all of its property by
reason of the foregoing, or approving any petition filed against the
Advisor for its reorganization, and such adjudication or order shall remain
in force or unstayed for a period of 30 days; or
(c) If the Advisor shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the
Federal bankruptcy laws, or for relief under any law for the relief of
debtors, or shall consent to the appointment of a receiver of itself or of
all or substantially all its property, or shall make a general assignment
for the benefit of its creditors, or shall admit in writing its inability
to pay its debts generally, as they become due.
The Advisor agrees that if any of the events specified in subsections (b)
and (c) of this Section 22 shall occur, it will give written notice thereof to
the Trustees within seven days after the occurrence of such event.
23. Action Upon Termination. From and after the effective date of
termination of this Agreement, pursuant to Sections 19, 21 or 22 hereof, the
Advisor shall not be entitled to compensation for further services hereunder but
shall be paid all compensation accruing to the date of termination. The Advisor
shall forthwith upon such termination:
(a) pay over to the Trust all monies collected and held for the
account of the Trust pursuant to this Agreement;
(b) deliver to the Trustees a full accounting, including a statement
showing all payments collected by it and a statement of any monies held by
it, covering the period following the date of the last accounting furnished
to the Trustees; and
(c) deliver to the Trustees all property and documents of the Trust
then in the custody of the Advisor.
24. Miscellaneous. The Advisor shall be deemed to be in a fiduciary
relationship to the shareholders of the Trust. The Advisor assumes no
responsibility under this Agreement other than to render the services called for
hereunder in good faith, and shall not be responsible for any action of the
Trustees in following or declining to follow any advice or recommendations of
the Advisor. Neither the Advisor nor any of its shareholders, directors,
officers, or employees shall be liable to the Trust, the Trustees, the holders
of securities of the Trust or to any successor or assign of the Trust for any
losses arising from the operation of the Trust if the Advisor had determined, in
good faith, that the course of conduct which caused the loss or liability was in
the best interests of the Trust and the liability or loss was not the result of
negligence or misconduct by the Advisor. However, in no event will the
directors, officers or employees of the Advisor be personally liable for any act
or failure to act unless it was the result of such person's willful misfeasance,
bad faith, gross negligence or reckless disregard of duty.
A-8
<PAGE> 28
25. Notices. Any notice, report, or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report, or other communication is accepted by the party to
whom it is given, and shall be given by being delivered at the following
addresses of the parties hereto:
The Trustees and/or the Trust:
Continental Mortgage and Equity Trust
Search Plaza
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President
The Advisor:
Basic Capital Management, Inc.
Search Plaza
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: Executive Vice President and Chief Financial Officer
Either party may at any time give notice in writing to the other party of a
change of its address for the purpose of this Section 25.
26. Headings. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.
27. Governing Law. This Agreement has been prepared, negotiated and
executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
Texas.
28. Execution. This instrument is executed and made on behalf of the Trust
by an officer of the Trust, not individually but solely as an officer and the
obligations under this Agreement are not binding upon, nor shall resort be had
to the private property of, any of the Trustees, shareholders, officers,
employees, or agents of the Trust personally, but bind only the Trust property.
IN WITNESS WHEREOF, CONTINENTAL MORTGAGE AND EQUITY TRUST, and BASIC
CAPITAL MANAGEMENT, INC., by their duly authorized officers, have signed these
presents all as of the day and year first above written.
CONTINENTAL MORTGAGE AND EQUITY TRUST
By: /s/ OSCAR W. CASHWELL
-----------------------------------
Oscar W. Cashwell
President
BASIC CAPITAL MANAGEMENT, INC.
By: /s/ HAMILTON P. SCHRAUFF
-----------------------------------
Hamilton P. Schrauff
Executive Vice President
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<PAGE> 29
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
FOR WITHHOLD
all nominees (except AUTHORITY TO
as marked to the vote for all nominees
contrary below) listed below
1. Election of Trustees: [ ] [ ]
Nominees: Ted P. Stokely, Edward L. Tixier,
Martin L. White, Edward G. Zampa
For, except vote withheld from the following nominee(s):
_____________________________________________
FOR AGAINST ABSTAIN
2. Approval of the renewal of the current advisory [ ] [ ] [ ]
agreement between the Trust and Basic Capital
Management, Inc.:
3. Other Business: I authorize the aforementioned [ ] [ ] [ ]
proxies in their discretion to vote upon such
other business as may properly come before the
Annual Meeting and any adjournments thereof.
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below. When a proxy card is properly executed
and returned, the Shares represented thereby will be voted in favor of the
election for each of the nominees, unless authority to vote for any such
nominee is specifically withheld. There will be no cumulative voting for the
election of Trustees. If any nominee is unable to serve or will not serve (an
event which is not anticipated), then the person acting pursuant to the
authority granted under the proxy will cast votes for the remaining nominees
and, unless the Board of Trustees takes action to reduce the number of
Trustees, for such other person(s) as he or she may select in place of such
nominees.
SIGNATURE _______________________________________________________ DATE _________
SIGNATURE (if held jointly) _____________________________________ DATE _________
NOTE: Please sign exactly as name appears herein. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. When signing for
corporation, please sign full corporate name by an authorized officer. When
signing for a partnership, please sign partnership name by an authorized
person. If shares are held in more than one capacity, this proxy shall be
deemed valid for all shares held in all capacities.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 22, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF
CONTINENTAL MORTGAGE AND EQUITY TRUST
The undersigned hereby appoints THOMAS A. HOLLAND and ROBERT A. WALDMAN,
and each of them, Proxies, with full power of substitution in each of them, in
the name, place and stead of the undersigned, to be at the Annual Meeting of
Shareholders of CONTINENTAL MORTGAGE AND EQUITY TRUST, to be held on Tuesday,
April 22, 1997, at 10:00 a.m., or at any adjournments thereof, according to the
number of votes that the undersigned would be entitled to vote if personally
present, upon the following matters:
THE BOARD OF TRUSTEES OF CONTINENTAL MORTGAGE AND EQUITY TRUST RECOMMENDS
A VOTE FOR ALL FOUR NOMINEES AND FOR THE RENEWAL OF THE ADVISORY AGREEMENT.
YOUR PROXY IS IMPORTANT. PLEASE INDICATE YOUR SUPPORT FOR THE BOARD OF
TRUSTEES BY MARKING THE BOXES FOR ELECTION OF TRUSTEES AND FOR THE RENEWAL OF
THE ADVISORY AGREEMENT. PLEASE SIGN, DATE AND MAIL THIS CARD TODAY IN THE
ENCLOSED ENVELOPE. IF NOT OTHERWISE MARKED ABOVE, YOUR PROXY WILL BE VOTED FOR
THE ELECTION OF ALL NOMINEES AND FOR THE RENEWAL OF THE ADVISORY AGREEMENT.
THIS PROXY REVOKES ALL PREVIOUS PROXIES.
(continued and to be signed and dated on the other side)
