<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996
Commission File Number 0-10503
CONTINENTAL MORTGAGE AND EQUITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
California 94-2738844
- ---------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- -------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, no par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 7, 1997, the Registrant had 4,026,376 shares of beneficial interest
outstanding. Of the total shares outstanding, 1,875,228 were held by other
than those who may be deemed to be affiliates, for an aggregate value of
$21,565,122 based on the last trade as reported on The Nasdaq Stock Market on
March 7, 1997. The basis of this calculation does not constitute a
determination by the Registrant that all of such persons or entities are
affiliates of the Registrant as defined in Rule 405 of the Securities Act of
1933, as amended.
Documents Incorporated by Reference:
NONE
- Exhibit Index Appears on Page 95 -
- Page 1 of 96 -
<PAGE> 2
INDEX TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I
------
Item 1. Business................................................. 3
Item 2. Properties............................................... 7
Item 3. Legal Proceedings........................................ 24
Item 4. Submission of Matters to a Vote of Security Holders...... 26
PART II
-------
Item 5. Market for Registrant's Shares of Beneficial
Interest and Related Shareholder Matters................. 27
Item 6. Selected Financial Data.................................. 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 30
Item 8. Financial Statements and Supplementary Data.............. 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 75
PART III
--------
Item 10. Trustees, Executive Officers and Advisor of the
Registrant............................................... 75
Item 11. Executive Compensation................................... 84
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 87
Item 13. Certain Relationships and Related Transactions........... 88
PART IV
-------
Item 14. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K........................ 92
Signature Page......................................................... 94
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
Continental Mortgage and Equity Trust (the "Trust" or the "Registrant") is a
California business trust organized pursuant to a declaration of trust dated
August 27, 1980, and amended and restated as of May 27, 1987 (as amended
through the date hereof, the "Declaration of Trust"). The Trust commenced
operations on December 3, 1980. The Trust has elected to be treated as a Real
Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Trust has, in the opinion
of the Trust's management, qualified for federal taxation as a REIT for each
year subsequent to December 31, 1980.
On October 25, 1996, the Trust's Board of Trustees approved a proposal to
convert the Trust from a California business trust into a Nevada corporation.
The Trust's Board of Trustees believes that the change from a California
business trust to a Nevada corporation will afford the Trust greater legal
certainty in matters of corporate governance and indemnification and therefore
greater predictability in the conduct of its business as a corporation under
Nevada law. The Trust has filed a Proxy Statement/Prospectus with the
Securities and Exchange Commission providing for a special meeting of the
Trust's shareholders. At such meeting, the Trust's shareholders will vote on
this proposal. Approval requires the vote of a majority of the Trust's
shareholders holding a majority of the Trust's outstanding shares of beneficial
interest. As of March 7, 1997, the Trust's advisor and its affiliates held
shares representing approximately 53.4% of the Trust's outstanding shares. A
date for the special meeting of the Trust's shareholders to vote on the
incorporation proposal has not been set.
The Trust's real estate portfolio at December 31, 1996 consisted of 48
properties held for investment, two equity method real estate partnerships
(owning five industrial warehouses and two office buildings) and six properties
held for sale, primarily acquired through foreclosure. Thirteen of the
properties held for investment were purchased during 1996. The Trust's
mortgage notes receivable portfolio at December 31, 1996 consisted of 16
mortgage loans. The Trust's real estate and mortgage notes receivable
portfolios are more fully discussed in ITEM 2. "PROPERTIES."
Business Plan and Investment Policy
The Trust's primary business and only industry segment is investing in equity
interests in real estate through direct acquisitions and partnerships and
financing real estate and real estate related activities through investments in
mortgage loans, including first, wraparound and junior mortgage loans. The
Trust's real estate is located throughout the continental United States.
Information regarding the real estate and mortgage notes receivable portfolios
of the Trust is set forth in ITEM 2. "PROPERTIES" and in Schedules III and IV
to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA".
3
<PAGE> 4
ITEM 1. BUSINESS (Continued)
Business Plan and Investment Policy (Continued)
The Trust's business is not seasonal. The Trust has determined to pursue a
balanced investment policy, seeking both current income and capital
appreciation. With respect to new investments, the Trust's plan of operation
is to continue to make equity investments in real estate and to continue its
program of investing in capital improvements and emphasizing high maintenance
standards with respect to its existing real estate portfolio. The Trust has
determined that it will no longer actively seek to fund or purchase mortgage
loans. It may, however, in special circumstances, originate mortgage loans or
provide purchase money financing in conjunction with a property sale. The
Trust does intend however, to service and hold for investment the mortgage
notes currently in its portfolio. The Trust also intends to pursue its rights
vigorously with respect to mortgage notes that are in default.
The type of new real estate investments made by the Trust will depend upon the
availability of suitable real estate investment opportunities. In general, the
Trust intends to be an aggressive and opportunistic investor. In 1997, the
Trust's investment strategy will be to continue the strategy begun in 1996 of
balancing its portfolio of apartments with new leveraged investments in
commercial properties (office buildings, industrial warehouses or shopping
centers) in the Southeast and Southwest, where a majority of the Trust's
properties are located and where the Trust's management believes there remains
a potential for sustained appreciation. The Trust will also continue its
emphasis on property sales to take advantage of stabilized real estate markets
by selling properties that have reached their potential. Further, to obtain
additional funds for investment and to lock in current interest rates, mortgage
financing will be sought on the Trust's one unencumbered apartment complex and
two unencumbered office buildings held for investment, as well as refinancing
of properties which are currently encumbered by mortgage debt that matures in
the next two years or where there is an interest rate advantage to the Trust.
Management of the Trust
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the day-to-
day operations of the Trust are performed by Basic Capital Management, Inc.
("BCM" or the "Advisor"), a contractual advisor under the supervision of the
Trust's Board of Trustees. The stated duties of the Advisor include, among
other things, locating, investigating, evaluating and recommending real estate
and mortgage note investment and sales opportunities as well as financing and
refinancing sources for the Trust. The Advisor also serves as a consultant in
connection with the Trust's business plan and investment policy decisions made
by the Trust's Board of Trustees.
BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips served as a Trustee of the Trust until December 31,
1992. Mr. Phillips also served as a director of BCM until December 22, 1989
and as Chief Executive Officer of BCM until September
4
<PAGE> 5
ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
1, 1992. Mr. Phillips serves as a representative of his children's trust which
owns BCM and, in such capacity, has substantial contact with the management of
BCM and input with respect to its performance of advisory services to the
Trust. BCM is more fully described in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS
AND ADVISOR OF THE REGISTRANT - The Advisor".
BCM has been providing advisory services to the Trust since March 28, 1989.
Renewal of BCM's advisory agreement with the Trust was approved at the annual
meeting of the Trust's shareholders held on May 31, 1996. BCM also serves as
advisor to Income Opportunity Realty Investors, Inc., ("IORI"), and
Transcontinental Realty Investors, Inc. ("TCI"). The Trustees of the Trust are
also directors of IORI and TCI and the officers of the Trust are also officers
of IORI and TCI. Mr. Phillips is a general partner of Syntek Asset Management,
L.P. ("SAMLP"), the general partner of National Realty, L.P. ("NRLP") and
National Operating, L.P. ("NOLP"), the operating partnership of NRLP. BCM
performs certain administrative functions for NRLP and NOLP on a cost-
reimbursement basis. BCM also serves as advisor to American Realty Trust, Inc.
("ART"). Mr. Phillips served as a director and Chairman of the Board of ART
until November 16, 1992. Randall M. Paulson, President of the Trust, also
serves as the President of BCM, IORI and TCI, Executive Vice President of ART
and President and sole director of Syntek Asset Management, Inc. ("SAMI"),
which is the managing general partner of SAMLP. The officers of the Trust are
also officers of ART. As of March 7, 1997 ART and BCM owned approximately
40.6% and 12.7%, respectively, of the Trust's outstanding shares of beneficial
interest and BCM and the Trust owned approximately 37.9% and 6.1%,
respectively, of ART's outstanding shares of common stock.
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel Realty Services, Ltd. ("Carmel,
Ltd.") provides such property management services. Carmel, Ltd. subcontracts
with other entities for the provision of the property-level management services
to the Trust. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr.
Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the
benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of seventeen of the Trust's commercial
properties and the industrial warehouses owned by a real estate partnership in
which the Trust is a partner to Carmel Realty, Inc. ("Carmel Realty"), which is
a company owned by SWI. Carmel Realty is entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Carmel, Ltd. as discussed
in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT - The
Advisor."
Carmel Realty is also entitled to receive real estate brokerage commissions in
accordance with the terms of a nonexclusive brokerage
5
<PAGE> 6
ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
agreement as discussed in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR TO
THE REGISTRANT - The Advisor."
The Trust has no employees. Employees of the Advisor render services to the
Trust.
Competition
The real estate business is highly competitive and the Trust competes with
numerous entities engaged in real estate activities (including certain entities
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Related
Party Transactions"), some of which may have greater financial resources than
those of the Trust. The Trust's management believes that success against such
competition is dependent upon the geographic location of the property, the
performance of property managers in areas such as marketing, collection and the
ability to control operating expenses, the amount of new construction in the
area and the maintenance and appearance of the property. Additional
competitive factors with respect to commercial properties are the ease of
access to the property, the adequacy of related facilities, such as parking,
and sensitivity to market conditions in setting rent levels. With respect to
apartments, competition is also based upon the design and mix of units and the
ability to provide a community atmosphere for the tenants. The Trust's
management believes that general economic circumstances and trends and new or
renovated properties in the vicinity of the property are also competitive
factors.
To the extent that the Trust seeks to sell any of its properties, the sales
prices for such properties may be affected by competition from other real
estate entities and financial institutions also attempting to sell their
properties located in areas in which the Trust's properties are located.
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Related Party Transactions", certain of the officers and
Trustees of the Trust also serve as officers and directors of certain other
entities, each of which is also advised by BCM, and each of which has business
objectives similar to those of the Trust. The Trust's Trustees, officers and
Advisor owe fiduciary duties to such other entities as well as to the Trust
under applicable law. In determining to which entity a particular investment
opportunity will be allocated, the officers, trustees or directors and the
Advisor consider the respective investment objectives of each such entity and
the appropriateness of a particular investment in light of each such entity's
existing real estate and mortgage notes receivable portfolios. To the extent
that any particular investment opportunity is appropriate to more than one of
such entities, such investment opportunity will be allocated to the entity
which has had funds available for investment for the longest period of time or,
if appropriate, the investment may be shared among all or some of such
entities.
6
<PAGE> 7
ITEM 1. BUSINESS (Continued)
Competition (Continued)
In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships", the Trust also competes with
other entities which are affiliates of the Advisor and which may have
investment objectives similar to the Trust's and that may compete with the
Trust in purchasing, selling, leasing and financing real estate and real estate
related investments. In resolving any potential conflicts of interest which
may arise, the Advisor has informed the Trust that it intends to continue to
exercise its best judgment as to what is fair and reasonable under the
circumstances in accordance with applicable law.
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to all the risks incident to ownership and financing of
real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks include, but are not
limited to, changes in general or local economic conditions, changes in
interest rates and the availability of permanent mortgage financing which may
render the acquisition, sale or refinancing of a property difficult or
unattractive and which may make debt service burdensome, changes in real estate
and zoning laws, increases in real estate taxes, federal or local economic or
rent controls, floods, earthquakes, hurricanes and other acts of God and other
factors beyond the control of the Trust's management or Advisor. Also, the
illiquidity of real estate investments may impair the ability of the Trust to
respond promptly to changing circumstances. The Trust's management believes
that such risks are partially mitigated by the diversification by geographic
region and property type of the Trust's real estate and mortgage notes
receivable portfolios. However, to the extent property acquisitions are
concentrated in any particular geographic region, the advantages of
diversification may be mitigated.
ITEM 2. PROPERTIES
The Trust's principal offices are located at 10670 North Central Expressway,
Suite 300, Dallas, Texas 75231. In the opinion of the Trust's management, the
Trust's offices are suitable and adequate for its present operations.
Details of the Trust's real estate and mortgage notes receivable portfolios at
December 31, 1996, are set forth in Schedules III and IV, respectively, to the
Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA". The discussions set forth below under the headings "Real
Estate" and "Mortgage Loans" provide certain summary information concerning the
Trust's real estate and mortgage notes receivable portfolios.
The Trust's real estate portfolio consists of properties held for investment,
investments in partnerships and properties held for sale, which were primarily
acquired through foreclosure of the collateral securing mortgage notes
receivable. The Trust holds a fee simple title
7
<PAGE> 8
ITEM 2. PROPERTIES (Continued)
to all of the properties in its real estate portfolio. The discussion set
forth below under the heading "Real Estate" provides certain summary
information concerning the Trust's properties held for investment, properties
held for sale and investments in partnerships.
The Trust's real estate is geographically diversified. At December 31, 1996,
the Trust held investments in apartments and/or commercial properties in each
geographic region of the continental United States, other than the Northeast
region. However, the Trust's apartments and commercial properties are
concentrated in the Southeast and Southwest regions, as shown more specifically
in the table under "Real Estate" below. At December 31, 1996, the Trust held
mortgage notes receivable secured by real estate located in the Southeast,
Southwest and Midwest regions of the continental United States with a
concentration in the Southeast and Southwest regions, as shown more
specifically in the table under "Mortgage Loans" below.
At December 31, 1996, none of the Trust's properties, partnership investments
or mortgage notes receivable exceeded 10% of the Trust's total assets. At
December 31, 1996, 86% of the Trust's assets consisted of properties held for
investment, 2% consisted of properties held for sale, 1% consisted of
investments in partnerships and 3% consisted of mortgage notes and interest
receivable. The remaining 8% of the Trust's assets were cash, cash
equivalents, marketable equity securities and other assets. The percentage of
the Trust's assets invested in any one category is subject to change and no
assurance can be given that the composition of the Trust's assets in the future
will approximate the percentages listed above.
To continue to qualify for federal taxation as a REIT under the Code, the Trust
is required, among other things, to hold at least 75% of the value of its total
assets in real estate assets, government securities, cash and cash equivalents
at the close of each quarter of each taxable year.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
8
<PAGE> 9
ITEM 2. PROPERTIES (Continued)
Geographic Regions
The Trust has divided the continental United States into the following
geographic regions.
Northeast region comprised of the states of Connecticut, Delaware,
Maryland, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Vermont, and the District of Columbia.
The Trust has no properties in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
The Trust has 5 apartments and 6 commercial properties in this region.
Southwest region comprised of the states of Arizona, Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. The Trust has 18 apartments
and 12 commercial properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa,
Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota,
Ohio, South Dakota, West Virginia and Wisconsin. The Trust has 2
apartments and 1 commercial property in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Trust has 3 apartments and 2 commercial
properties in this region.
Pacific region comprised of the states of California, Oregon and
Washington. The Trust has 1 apartment in this region.
Excluded from the above are four parcels of unimproved land, as described
below.
Real Estate
At December 31, 1996, over 90% of the Trust's assets were invested in real
estate. The Trust invests in real estate located throughout the continental
United States, either on a leveraged or nonleveraged basis. The Trust's real
estate portfolio consists of properties held for investment, investments in
partnerships, properties held for sale, which were primarily acquired through
foreclosure of the collateral securing mortgage notes receivable, and
investments in the equity securities of real estate entities.
Types of Real Estate Investments. The Trust's real estate consists of
commercial properties (office buildings, industrial facilities and shopping
centers) and apartments or similar properties having established income-
producing capabilities. In selecting new real estate investments, the
location, age and type of property, gross rentals,
9
<PAGE> 10
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
lease terms, financial and business standing of tenants, operating expenses,
fixed charges, land values and physical condition are among the factors
considered. The Trust may acquire properties subject to or assume existing
debt and may mortgage, pledge or otherwise obtain financing for its properties.
The Trust's Board of Trustees may alter the types of and criteria for selecting
new real estate investments and for obtaining financing without a vote of
shareholders to the extent such policies are not governed by the Trust's
Declaration of Trust.
Although the Trust has typically invested in developed real estate, the Trust
may also invest in new construction or development either directly or in
partnership with nonaffiliated parties or affiliates (subject to approval by
the Trust's Board of Trustees). To the extent that the Trust invests in
construction and development projects, the Trust would be subject to business
risks, such as cost overruns and construction delays, associated with such
higher risk projects.
As of December 31, 1996, the Trust did not have any properties on which
significant capital improvements were in process.
In the opinion of the Trust's management, the properties owned by the Trust are
adequately covered by insurance.
The following table sets forth the percentages, by property type and geographic
region, of the Trust's real estate (other than unimproved land as described
below) at December 31, 1996.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
-------- ---------- ----------
<S> <C> <C>
Northeast...................... - % - %
Southeast...................... 21.0 38.7
Southwest...................... 56.1 48.8
Midwest........................ 14.0 4.0
Mountain....................... 5.7 8.5
Pacific........................ 3.2 -
----- ----
100.0% 100.0%
</TABLE>
The foregoing table is based solely on the number of apartment units and amount
of commercial square footage owned by the Trust and does not reflect the value
of the Trust's investment in each region. The Trust also owns four parcels of
unimproved land, one parcel of 5 acres in the Southeast region and three
parcels of 128 acres, 236 acres, and 5.4 acres in the Southwest region. See
Schedule III to the Consolidated Financial Statements included at ITEM 8.
"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a more detailed description
of the Trust's real estate portfolio.
10
<PAGE> 11
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
A summary of the activity in the Trust's owned real estate portfolio during
1996 is as follows:
<TABLE>
<S> <C>
Owned properties in real estate portfolio
at January 1, 1996.................................... 47
Properties acquired through purchase......................... 13
Properties sold.............................................. (5)
Property lost to foreclosure................................. (1)
Owned properties in real estate portfolio
at December 31, 1996.................................. 54
===
</TABLE>
Properties Held for Investment. Set forth below are the Trust's properties
held for investment and the monthly rental rate for apartments and the average
annual rental rate for commercial properties and occupancy thereof at December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
Units/ ----------------------- --------------------------
Property Location Square Footage 1996 1995 1994 1996 1995 1994
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments
- ----------
4242 Cedar Springs Dallas, TX 76 units/
60,600 sq. ft. $ .75 $ .72 $ .71 96% 95% 99%
Applecreek Dallas, TX 216 units/
225,952 sq. ft. .52 .50 .48 90% 90% 88%
Camelot Largo, FL 120 units/
141,024 sq. ft. .48 .48 .46 94% 93% 98%
Country Crossing Tampa, FL 227 units/
199,952 sq. ft. .51 .51 .48 93% 91% 91%
Edgewood Lansing, IL 353 units/
320,638 sq. ft. .72 .71 .68 91% 94% 94%
El Chapparal San Antonio, TX 190 units/
174,220 sq. ft. .64 .63 .61 89% 92% 93%
Fairways Longview, TX 152 units/
134,176 sq. ft. .51 .50 .48 91% 90% 91%
Forest Ridge Denton, TX 56 units/
65,480 sq. ft. .59 .57 .53 98% 95% 96%
Fountain Lake Texas City, TX 166 units/
161,220 sq. ft. .52 .52 .50 90% 90% 95%
Glenwood Addison, TX 168 units/
134,432 sq. ft. .66 * * 96% * *
Grove Park Plano, TX 188 units/
143,556 sq. ft. .65 * * 95% * *
Heritage on the Jacksonville, FL 301 units/
River 289,490 sq. ft. .58 .55 * 92% 94% *
In the Pines Gainesville, FL 242 units/
294,860 sq. ft. .48 .48 .44 92% 98% 96%
McCallum Crossing Dallas, TX 322 units/
172,796 sq. ft. .84 .81 .76 98% 98% 98%
McCallum Glen Dallas, TX 275 units/
159,850 sq. ft. .80 .76 * 97% 95% *
Oak Park IV Clute, TX 108 units/
78,708 sq. ft. .49 .50 .48 79% 73% 81%
Oak Run Pasadena, TX 160 units/
128,016 sq. ft. .41 * * 96% * *
Park at Colonnade San Antonio, TX 211 units/
188,000 sq. ft. .52 * * 96% * *
Park Lane Dallas, TX 97 units/
87,260 sq. ft. .55 .53 .51 93% 92% 93%
</TABLE>
11
<PAGE> 12
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
<TABLE>
<CAPTION>
Rent Per
Units/ Square Foot Occupancy
Square Footage/ ----------------------- -------------------------
Property Location Acres 1996 1995 1994 1996 1995 1994
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Apartments - Continued
- ----------
Parkwood Knoll San Bernardino, CA 178 units/
149,802 sq. ft $ .64 $ .62 $ .61 95% 98% 93%
Pierce Tower Denver, CO 57 units/
45,120 sq. ft. .93 .91 .88 97% 97% 98%
Quail Oaks Balch Springs, TX 131 units/
72,848 sq. ft. .63 .58 .53 99% 99% 98%
Somerset Texas City, TX 200 units/
163,368 sq. ft. .59 .60 .52 89% 91% 91%
Stone Oak San Antonio, TX 252 units/
187,686 sq. ft. .60 .58 .55 88% 93% 93%
Sunset Lake Waukegan, IL 414 units/
302,640 sq. ft. .79 .76 .73 88% 95% 91%
Willow Creek El Paso, TX 112 units/
103,140 sq. ft. .47 .52 .51 87% 80% 94%
Willo-Wick Gardens Pensacola, FL 152 units/
153,360 sq. ft. .51 .46 * 96% 66% *
Willow Wick North Augusta, SC 104 units/
94,128 sq. ft. .50 .47 * 93% 99% *
Woodbridge Westminster, CO 194 units/
104,500 sq. ft. .83 .82 .72 97% 97% 79%
Office Buildings
- ----------------
2626 Cole Dallas, TX 119,632 sq. ft. 13.09 * * 99% * *
3400 Carlisle Dallas, TX 74,000 sq. ft. 10.50 * * 98% * *
Amoco New Orleans, LA 378,244 sq. ft. 9.93 * * 33% * *
Hampton Court Dallas, TX 104,001 sq. ft. 12.80 * * 92% * *
NASA Office Park Clear Lake, TX 78,159 sq. ft. 10.46 10.00 9.74 64% 55% 63%
Northpoint Central Houston, TX 176,043 sq. ft. 10.50 * * 90% * *
Tollhill West Dallas, TX 159,546 sq. ft. 12.60 11.85 11.38 58% 94% 91%
Windsor Plaza Windcrest, TX 80,522 sq. ft. 11.38 10.22 9.56 84% 87% 78%
Industrial Warehouses
- ---------------------
Brookfield Corporate
Center Chantilly, VA 63,504 sq. ft. 6.19 6.00 * 100% 85% *
Central Storage Dallas, TX 216,035 sq. ft. .99 * * 100% * *
Kelly Warehouses Dallas, TX 330,334 sq. ft. 2.43 2.20 * 93% 88% *
McLeod Commerce
Center Orlando, FL 110,914 sq. ft. 6.38 6.09 6.08 80% 83% 73%
Northgate
Distribution Marietta, GA 208,386 sq. ft. 3.91 3.82 3.70 100% 89% 100%
Shady Trail Dallas, TX 42,900 sq. ft. 2.25 * * 0% * *
Sullyfield
Commerce Center Chantilly, VA 243,813 sq. ft. 5.23 5.17 * 90% 84% *
Shopping Centers
- ----------------
Builders Square St. Paul, MN 115,492 sq. ft. 2.65 2.65 2.65 100% 100% 100%
Promenade Highland Ranch, CO 133,558 sq. ft. 9.35 * * 80% * *
Rio Pinar Orlando, FL 113,638 sq. ft. 8.33 8.26 8.31 88% 89% 85%
Land
- ----
State Highway 121 Collin County, TX 236 Acres
- -----------------------
</TABLE>
* Property was purchased in 1995 or 1996.
Occupancy presented above and throughout this ITEM 2. is without reference to
whether leases in effect are at, below or above market rates.
12
<PAGE> 13
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In February 1995, after determining that further investment in Genesee Towers
Office Building in Flint, Michigan, could not be justified without a
substantial modification of the mortgage debt, the Trust ceased making debt
service payments on the $8.8 million nonrecourse mortgage secured by the
property. Accordingly, as of December 31, 1994, the carrying value of the
property was written down by $1.2 million (to $8.6 million, which approximated
fair value of the property) to the amount of the nonrecourse mortgage. In
February 1996, the Trust and the lender entered into a forbearance agreement
that provided, among other things, that until August 20, 1996, the Trust make
monthly payments of the greater of regular scheduled principal and interest or
cash flow from the property. The deed to the property was placed in escrow
during the term of the forbearance agreement. The Trust transferred the
property to the lender in September 1996. During the pendency of the
foreclosure negotiations, the Trust continued to accrue and expense its
interest obligations on such mortgage. The Trust recorded a negative provision
for loss of $884,000 in September 1996 with the elimination of its obligation
for such accrued interest, on the transfer of the property to the lender.
In March 1996, the Trust purchased the Hampton Court Office Building, a 104,001
square foot office building in Dallas, Texas, for $7.7 million. The Trust paid
$1.4 million in cash and obtained new mortgage financing of $6.3 million. The
mortgage bears interest at 8.0% per annum, requires monthly payments of
principal and interest of $42,000 and matures in March 2001. In conjunction
with the financing, the Trust established various escrow accounts in the amount
of $1.5 million. The Trust paid a real estate brokerage commission of $205,000
to Carmel Realty and an acquisition fee of $77,000 to BCM based on the $7.7
million purchase price of the property.
In April 1996, the Trust purchased the Amoco Building, a 378,244 square foot
office building in New Orleans, Louisiana, for $5.9 million in cash. The Trust
paid a real estate brokerage commission of $188,000 to Carmel Realty and an
acquisition fee of $59,000 to BCM based on the $5.9 million purchase price of
the property.
Also in April 1996, the Trust purchased the Central Storage Warehouse, a
216,035 square foot industrial warehouse in Dallas, Texas, for $2.2 million in
cash. The Trust paid a real estate brokerage commission of $86,000 to Carmel
Realty and an acquisition fee of $22,000 to BCM based on the $2.2 million
purchase price of the property. In August 1996, the Trust obtained mortgage
financing in the amount of $1.4 million. The Trust received net cash of $1.4
million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 8.5% per annum through July 30, 1999
and at a variable rate thereafter, requires monthly payments of principal and
interest of $13,786 through July 30, 1999 adjusted thereafter based on the then
effective interest rate and matures in July 2011. The Trust paid BCM a
mortgage brokerage and equity refinancing fee of $14,000 based on the new $1.4
million mortgage.
13
<PAGE> 14
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In April 1996, the Trust refinanced the mortgage debt secured by the Edgewood
Apartments in Lansing, Illinois in the amount of $8.1 million. The Trust
received net cash of $1.3 million after the payoff of $6.7 million in existing
mortgage debt, including a $60,000 prepayment penalty. The remainder of the
refinancing proceeds were used to pay various closing costs associated with the
refinancing. The new mortgage bears interest at 8.65% per annum, requires
monthly payments of principal and interest of $66,000 and matures in May 2006.
The Trust paid BCM a mortgage brokerage and equity refinancing fee of $81,000
based upon the new $8.1 million mortgage.
Also in April 1996, the Trust refinanced the mortgage debt secured by the In
the Pines Apartments in Gainesville, Florida in the amount of $6.0 million.
The Trust received net cash of $415,000 after the payoff of $5.3 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
pay various closing costs associated with the refinancing. The new mortgage
bears interest at the rate of 8.65% per annum, requires monthly payments of
principal and interest of $49,000 and matures in May 2006. The Trust paid BCM
a mortgage brokerage and equity refinancing fee of $60,000 based upon the new
$6.0 million mortgage.
Also in April 1996, the Trust refinanced the mortgage debt secured by the Quail
Oaks Apartments in Balch Springs, Texas in the amount of $1.3 million. The
Trust received net cash of $413,000 after the payoff of $753,000 in existing
mortgage debt. The remainder of the refinancing proceeds were used to pay
various closing costs associated with the refinancing. The new mortgage bears
interest at 8.875% per annum, requires monthly payments of principal and
interest of $10,798 and matures in May 2006. The Trust paid BCM a mortgage
brokerage and equity refinancing fee of $13,000 based on the new $1.3 million
mortgage.
In May 1996, the Trust obtained mortgage financing for the previously
unencumbered Applecreek Apartments in Dallas, Texas in the amount of $1.8
million. The Trust received net cash of $1.6 million after payment of various
closing costs associated with the financing. The mortgage bears interest at
8.875% per annum, requires monthly payments of principal and interest of
$15,076 and matures in June 2006. The Trust paid BCM a mortgage brokerage and
equity refinancing fee of $18,000 based on the new $1.8 million mortgage.
In June 1996, the Trust purchased the Grove Park Apartments, a 188 unit
apartment complex in Plano, Texas, for $4.4 million. The Trust paid $1.2
million in cash and assumed the existing mortgage of $3.2 million. The
mortgage bears interest at 8.9% per annum, requires monthly payments of
principal and interest of $26,315 and matures in March 1998. The Trust paid a
$153,000 real estate brokerage commission to Carmel Realty and a $44,000
acquisition fee to BCM based on the $4.4 million purchase price of the
property.
14
<PAGE> 15
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Also in June 1996, the Trust refinanced the mortgage debt secured by the
Fairways Apartments in Longview, Texas in the amount of $2.0 million. The
Trust received net cash of $210,000 after the payoff of $1.7 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
pay various closing costs associated with the refinancing. The new mortgage
bears interest at 8.9375% per annum, requires monthly payments of principal and
interest of $16,003 and matures in July 2006. The Trust paid BCM a mortgage
brokerage and equity refinancing fee of $20,000 based on the new $2.0 million
mortgage.
In July 1996, the Trust purchased the Promenade Shopping Center, a 133,558
square foot shopping center in Highlands Ranch, Colorado, for $8.1 million.
The Trust paid $1.8 million in cash and obtained new mortgage financing for the
remaining $6.3 million of the purchase price. A first lien mortgage in the
amount of $5.6 million bears interest at 9.0% per annum, requires monthly
payments of principal and interest of $50,385 and matures in July 1999. A
second lien mortgage in the amount of $700,000 bears interest at 9.0% per
annum, requires monthly payments of interest only of $5,250 and matures in June
1997. The Trust paid a $232,000 real estate brokerage commission to Carmel
Realty and a $81,000 acquisition fee to BCM based on the $8.1 million purchase
price of the property.
Also in July 1996, the Trust purchased the Park at Colonnade Apartments, a 211
unit apartment complex in San Antonio, Texas, for $4.2 million. The Trust paid
$700,000 in cash and obtained new mortgage financing for the remaining $3.5
million of the purchase price. The mortgage bears interest at 10.0% per annum,
through July 1997, increasing to 10.5% per annum thereafter, requires monthly
payments of interest only, and matures in January 1998. The Trust paid a
$146,000 real estate brokerage commission to Carmel Realty and a $42,000
acquisition fee to BCM based on the $4.2 million purchase price of the
property.
Also in July 1996, the Trust purchased the 3400 Carlisle Building, a 74,000
square foot office building in Dallas, Texas, for $5.3 million. The Trust paid
$800,000 in cash and obtained new mortgage financing for the remaining $4.5
million of the purchase price. The mortgage bears interest at 8.93% per annum,
requires monthly payments of principal and interest of $33,488 through July 31,
1998, increasing to $38,457 through maturity in March 2001. The Trust paid a
$177,000 real estate brokerage commission to Carmel Realty and a $53,000
acquisition fee to BCM based on the $5.3 million purchase price of the
property.
Also in July 1996, the Trust refinanced the mortgage debt secured by the
Woodbridge Apartments in Denver, Colorado in the amount of $3.0 million. The
Trust received net cash of $2.0 million after the payoff of $903,000 in
existing mortgage debt. The remainder of the refinancing proceeds were used to
pay various closing costs associated with the refinancing. The new mortgage
bears interest at 9.125% per annum, requires monthly payments of principal and
interest of $25,433 and matures in August 2006. The Trust paid BCM a mortgage
brokerage and equity refinancing fee of $30,000 based on the new $3.0 million
mortgage.
15
<PAGE> 16
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Also in July 1996, the Trust obtained mortgage financing for the previously
unencumbered Forest Ridge Apartments in Denton, Texas in the amount of $1.2
million. The Trust received net cash of $1.1 million after payment of various
closing costs associated with the financing. The mortgage bears interest at
8.875% per annum, requires monthly payments of principal and interest of
$10,175 and matures in August 2006. The Trust paid BCM a mortgage brokerage
and equity refinancing fee of $12,000 based on the $1.2 million mortgage.
In August 1996, the Trust refinanced the mortgage debt secured by the McCallum
Glen Apartments in Dallas, Texas for $5.2 million. The Trust received net cash
of $761,000 after the payoff of the existing mortgage of $4.2 million and the
payment of various closing costs. The new mortgage bears interest at 8.5% per
annum, requires monthly payments of principal and interest of $40,176 and
matures in September 2006. The Trust paid BCM a mortgage brokerage and equity
refinancing fee of $52,250 based on the new $5.2 million mortgage.
In September 1996, the Trust purchased the Shady Trail Warehouse, a 42,900
square foot industrial warehouse in Dallas, Texas, for $681,000. The Trust
paid $131,000 in cash and obtained new mortgage financing for the remaining
$550,000 of the purchase price. The mortgage bears interest at 8.5% per annum,
requires monthly payments of principal and interest of $4,429 and matures in
October 2001. The Trust paid a $27,000 real estate brokerage commission to
Carmel Realty and a $7,000 acquisition fee to BCM based on the $681,000
purchase price of the property.
In October 1996, the Trust purchased 236 acres of undeveloped land on State
Highway 121 in Collin County, Texas for $3.9 million in cash. The Trust paid a
real estate brokerage commission of $136,000 to Carmel Realty and a $39,000
acquisition fee to BCM based on the $3.9 million purchase price of the
property.
In November 1996, the Trust purchased the Glenwood Apartments, a 168 unit
apartment complex in Addison, Texas, for $4.2 million. The Trust paid $1.3
million in cash and assumed the existing mortgage of $2.9 million. The
mortgage bears interest at 9.25% per annum, requires monthly payments of
principal and interest of $27,476 and matures in November 2004. The Trust paid
a real estate brokerage commission of $145,000 to Carmel Realty and a $42,000
acquisition fee to BCM based on the $4.2 million purchase price of the
property.
Also in November 1996, the Trust refinanced the mortgage debt secured by the
Somerset Apartments in Texas City, Texas for $3.2 million. The Trust received
net cash of $452,000 after the payoff of the existing mortgage of $2.6 million
and the payment of various closing costs associated with the refinancing. The
new mortgage bears interest at 8.3% per annum, requires monthly payments of
principal and interest of $25,654 and matures in December 2006. The Trust paid
BCM a mortgage brokerage and equity refinancing fee of $32,400 based on the new
$3.2 million mortgage.
16
<PAGE> 17
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In December 1996, the Trust purchased the Oak Run Apartments, a 160 unit
apartment complex in Pasadena, Texas, for $3.8 million. The Trust paid $1.2
million in cash and obtained new mortgage financing for the remaining $2.6
million of the purchase price. The mortgage bears interest at 8.88% per annum,
requires monthly payments of principal and interest of $21,805 and matures in
January 2002. The Trust paid a $133,000 real estate brokerage commission to
Carmel Realty and a $38,000 acquisition fee to BCM based on the $3.8 million
purchase price of the property.
Also in December 1996, the Trust purchased the Northpoint Central Office
Building, a 176,043 square foot office building in Houston, Texas, for $8.5
million. The Trust paid $2.7 million in cash with the seller financing the
remaining $5.8 million of the purchase price. The mortgage bears interest at
9.5% per annum, requires monthly payments of interest only and matures in
September 1997. The Trust paid a real estate brokerage commission of $241,000
to Carmel Realty and a $85,000 acquisition fee to BCM based on the $8.5 million
purchase price.
Also in December 1996, the Trust purchased the 2626 Cole Office Building, a
119,632 square foot office building in Dallas, Texas, for $8.7 million. The
Trust paid $2.2 million in cash and obtained new mortgage financing of $6.5
million. The mortgage bears interest at 9.0% per annum, requires monthly
payments of principal and interest of $59,409 and matures in December 1998.
The Trust paid a real estate brokerage commission of $245,000 to Carmel Realty
and a $87,000 acquisition fee to BCM based on the $8.7 million purchase price.
In January 1997, the Trust purchased the Lost Timbers Apartments, a 180 unit
apartment complex in Houston, Texas, for $3.5 million. The Trust paid $800,000
in cash and assumed the existing mortgage of $2.7 million. The mortgage bears
interest at a variable rate, currently 9.29% per annum, adjusted semi-annually,
requires monthly payments of principal and interest of $22,704, also adjusted
annually and matures in June 1999. The Trust paid a real estate brokerage
commission of $125,450 to Carmel Realty and a $35,000 acquisition fee to BCM
based on the $3.5 million purchase price.
In February 1997, the Trust purchased the Watters Road land, 103 acres of
undeveloped land on State Highway 121 in Collin County, Texas for $1.7 million
in cash. The Trust paid a real estate brokerage commission of $68,000 to
Carmel Realty and a $17,000 acquisition fee to BCM based on the $1.7 million
purchase price of the property.
Also in February 1997, the Trust purchased the Jefferson Office Building, a
71,877 square foot office building in Washington, D.C., for $13.2 million. The
Trust paid $4.1 million in cash and obtained new mortgage financing of $9.1
million. The mortgage bears interest at 8.0% per annum, requires monthly
payments of principal and interest of $70,000 and matures in March 1999. The
Trust paid a real estate brokerage commission of $319,000 to Carmel Realty and
a $132,000 acquisition fee to BCM based on the $13.2 million purchase price.
17
<PAGE> 18
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Partnership Properties. Set forth below are the properties owned by the
partnerships in which the Trust is an equity investee and the average annual
rental rate and occupancy thereof at December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
----------------------- --------------------------
Property Location Square Footage 1996 1995 1994 1996 1995 1994
- ----------------- -------------- --------------- ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Sacramento Nine Rancho Cordova, CA 105,249 sq. ft. $10.61 $10.98 $10.70 100% 100% 100%
Indcon, L.P. San Antonio, TX 101,500 sq. ft. 2.65 2.12 1.93 77% 100% 100%
Atlanta, GA 113,530 sq. ft. 2.43 2.29 2.14 60% 80% 84%
Memphis, TN 112,382 sq. ft. 2.65 2.06 1.92 37% 67% 72%
</TABLE>
The Trust, in partnership with National Income Realty Trust ("NIRT"), owns
Sacramento Nine ("SAC 9") which in turn owns two office buildings. The Trust
has a 30% general partner interest in the partnership. The Trust accounts for
its investment in the partnership using the equity method.
The Trust and NIRT are also the partners in Income Special Associates ("ISA"),
a joint venture partnership in which the Trust has a 60% partnership interest.
ISA in turn owns a 100% interest in Indcon, L.P. ("Indcon"), formerly known as
Adams Properties Associates. Indcon currently owns 5 industrial warehouses.
The Indcon partnership agreement requires consent of both the Trust and NIRT
for any material changes in the operations of the partnership's properties,
including sales, refinancings and changes in property manager. Therefore, the
Trust is a noncontrolling partner and accounts for its investment in Indcon
using the equity method.
In February and March 1996, Indcon sold 25 of its industrial warehouses for a
total of $36.2 million in cash. Indcon received net cash of $14.2 million, of
which the Trust's equity share was $8.5 million, after the payoff of existing
mortgage debt with a principal balance of $23.5 million. Indcon recognized a
gain of $617,000 on the sale, of which the Trust's equity share was $370,000.
Indcon paid a real estate sales commission of $585,000 to Carmel Realty based
upon the $36.2 million sales price of the properties.
In March 1996, Indcon reached a settlement with an insurance company on the
fire loss of one of its industrial warehouses. Indcon received a total of $2.2
million in cash. Indcon does not intend to rebuild the destroyed warehouse and
accordingly has recognized an extraordinary gain of $1.2 million, of which the
Trust's equity share was $663,000.
In April 1996, Indcon sold two additional industrial warehouses for $1.8
million in cash, of which the Trust's equity share was $1.1 million. Indcon
recognized a loss of $522,000 on the sale, of which the Trust's equity share
was $313,000. Indcon paid a real estate sales commission of $16,000 to Carmel
Realty based upon the $1.8 million sales price of the properties.
18
<PAGE> 19
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Properties Held for Sale. Set forth below are the Trust's properties held for
sale, all of which were obtained through foreclosure, and the monthly rental
rate for apartments and the average annual rental rate for commercial
properties and occupancy thereof at December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Rent Per
Units/ Square Foot Occupancy
Square Footage/ ----------------------- --------------------------
Property Location Acres 1996 1995 1994 1996 1995 1994
- ----------------- -------------- --------------- ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
- ---------
Shadowridge Rocksprings, WY 64 units/
52,700 sq. ft. $ .57 $ .59 $ .57 87% 92% 95%
Office Building
- ---------------
Pinemont Houston, TX 19,685 sq. ft. 9.36 9.82 9.79 69% 80% 100%
Industrial Warehouse
- --------------------
Ogden Industrial Ogden, UT 107,112 sq. ft. 2.80 2.76 2.64 100% 100% 100%
Land
- ----
Del Ray Forum Delray Beach, FL 5 acres
Northwest
Crossings Houston, TX 5.4 acres
Round Mountain Austin, TX 128 acres
</TABLE>
In February 1996, the Trust sold the Rivertree Apartments in Hurst, Texas, for
$1.8 million. The Trust received net cash of $959,000 after the payment of
various closing costs associated with the sale. In conjunction with the sale
the Trust provided $750,000 of purchase money financing which was paid in full
in August 1996. The Trust paid a real estate sales commission of $70,000 to
Carmel Realty based on the $1.8 million sales price of the property. The Trust
recognized a gain of $378,000 on the sale. In September 1996, the Trust
received an insurance reimbursement for hail damage that had occurred in 1995
and recognized an extraordinary gain of $149,000.
In May 1996, the Trust sold the Sunset Towers Apartments in San Francisco,
California, for $24.1 million in cash. The Trust received net cash of $9.7
million after the payoff of $14.0 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Trust paid a
real estate sales commission of $482,000 to Carmel Realty based on the $24.1
million sales price of the property. The Trust recognized a gain of $5.4
million on the sale.
In June 1996, the Trust sold the Crystal Court Apartments, a foreclosed
property held for sale, in Detroit, Michigan, for $700,000. The Trust paid a
real estate sales commission of $28,000 to Carmel Realty based on the $700,000
sales price of the property. The Trust recognized no loss on the sale beyond
the amounts previously provided.
In August 1996, the Trust sold the Southgate Square Apartments in Round Rock,
Texas, for $6.1 million in cash. The Trust received net cash of $3.0 million
after the payoff of $2.9 million in existing mortgage debt and the payment of
various closing costs associated with the sale. The
19
<PAGE> 20
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Trust paid a real estate sales commission of $192,000 to Carmel Realty based on
the $6.1 million sales price. The Trust recognized a gain of $3.6 million on
the sale.
In September 1996, the Trust sold the Ravenswood Apartments in Stratford, New
Jersey, for $1.2 million in cash. The Trust paid a real estate sales
commission of $49,600 to Carmel Realty based on the $1.2 million sales price.
The Trust recognized no gain or loss on the sale.
In October 1996, the Trust sold .60 acres of the 6 acre parcel of Northwest
Crossing land in Houston, Texas for $290,000 in cash. The Trust recognized no
gain or loss on the sale.
The three parcels of unimproved land listed above were each obtained through
foreclosure. Two were obtained through foreclosure of a mortgage note secured
primarily by office buildings. The third and largest, the Round Mountain
parcel, was intended to be developed in 1983 when the Trust funded the mortgage
loan secured by the land.
The Trust intends to hold these parcels of unimproved land until the market
conditions in the areas in which the properties are located improve, at which
time the Trust intends to offer the properties for sale.
Mortgage Loans
In addition to real estate, a substantial portion of the Trust's assets are
invested in mortgage notes receivable, principally those secured by income-
producing real estate. The Trust expects that the percentage of its assets
invested in mortgage loans will decrease, as it has determined that it will no
longer actively seek to fund or acquire mortgage loans. It may, however, in
special circumstances, originate mortgage loans or provide purchase money
financing in conjunction with a property sale. The Trust intends to service
and hold for investment the mortgage notes currently in its portfolio. The
Trust's mortgage notes receivable consist of first mortgage loans and junior
mortgage loans.
Types of Mortgage Activity. The Trust has originated its own mortgage loans as
well as acquired existing mortgage notes either directly from builders,
developers or property owners, or through mortgage banking firms, commercial
banks or other qualified brokers. The Trust is generally not considering new
mortgage lending, except in special circumstances or in connection with
purchase money financing offered to facilitate the sale of Trust properties.
BCM, in its capacity as a mortgage servicer, services the Trust's mortgage
notes. The Trust's investment policy is described in ITEM 1. "BUSINESS -
Business Plan and Investment Policy".
Types of Properties Subject to Mortgages. The properties securing the Trust's
mortgage notes receivable portfolio at December 31, 1996,
20
<PAGE> 21
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
consisted of office buildings, apartments, a building housing a health club, a
ranch, a contract to purchase land, and single-family residences. To the extent
that the Declaration of Trust does not control such matters, the Trust's Board
of Trustees may alter the types of properties subject to mortgage loans in
which the Trust invests without a vote of the Trust's shareholders. In
addition to restricting the types of collateral and priority of mortgage loans
in which the Trust may invest, the Declaration of Trust imposes certain
restrictions on transactions with related parties, as discussed in ITEM 13.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
At December 31, 1996, the Trust's mortgage notes receivable portfolio included
seven mortgage loans with an aggregate outstanding balance of $5.8 million
secured by income-producing real estate located throughout the United States,
seven mortgage loans with an aggregate outstanding balance of $639,000 secured
by single-family residences also located throughout the United States, one loan
with an outstanding balance of $1.4 million secured by a ranch in Henderson
County, Texas and one loan with an outstanding balance of $500,000 secured by a
contract to purchase land in Dallas, Texas. At December 31, 1996, a total of
3% of the Trust's assets were invested in mortgage notes receivable.
The following table sets forth the percentages (based on the outstanding
mortgage note receivable balance), by both property type and geographic region,
of the properties that serve as collateral for the Trust's outstanding mortgage
notes receivable portfolio at December 31, 1996. The table does not include
the $639,000 in mortgage notes secured by single-family residences discussed in
the preceding paragraph, the $500,000 secured by a contract to purchase land or
the $1.4 million mortgage note secured by a ranch. See Schedule IV to the
Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA" for further details of the Trust's mortgage notes
receivable portfolio.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Total
------------ ---------- ---------- -----
<S> <C> <C> <C>
Southeast.................... 9.5% 39.2% 48.7%
Southwest.................... 17.2 29.9 47.1
Midwest...................... 4.2 - 4.2
---- ---- -----
30.9% 69.1% 100.0%
</TABLE>
A summary of the activity in the Trust's mortgage notes receivable portfolio
during 1996 is as follows:
<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio
at January 1, 1996..................................... 14
Loans funded................................................ 3
Loan paid in full........................................... (1)
--
Loans in mortgage notes receivable portfolio
at December 31, 1996................................... 16
===
</TABLE>
21
<PAGE> 22
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
First Mortgage Loans. The Trust invests in first mortgage notes, with either
short, medium or long-term maturities. First mortgage loans generally provide
for level periodic payments of principal and interest sufficient to
substantially repay the loan prior to maturity, but may involve interest-only
payments or moderate amortization of principal and a "balloon" principal
payment at maturity. With respect to first mortgage loans, the Trust's policy
is to require that the borrower provide a mortgagee's title policy or an
acceptable legal title opinion as to the validity and the priority of the
mortgage lien over all other obligations, except liens arising from unpaid
property taxes and other exceptions normally allowed by first mortgage lenders
in the relevant area. The Trust may grant to other lenders participations in
first mortgage loans originated by the Trust.
The following discussion briefly describes the events that affected previously
funded first mortgage loans during 1996.
At December 31, 1996, two of the Trust's first mortgage notes receivable with
principal balances totaling $2.1 million were in default. One of the notes,
with a principal balance of $1.4 million, matured in November 1995. The
borrower is currently negotiating with the Trust for an extension of the note
in return for a principal paydown and payment of all accrued interest, which
totaled $276,000 at December 31, 1996. In February 1997, the Trust received a
payment of $470,000 from the borrower, $305,000 being applied against accrued
interest and $165,000 being applied to reduce the principal balance of the
note. The Trust does not anticipate incurring a loss on this note as the
estimated value of the property securing the note is in excess of the carrying
value of the note. The other note, with a principal balance of $700,000,
matured in July 1993. The Trust continues to receive partial interest payments
monthly on the note. The Trust does not anticipate incurring a loss on this
note in excess of previously established reserves.
Wraparound Mortgage Loans. The Trust invests in wraparound mortgage loans,
sometimes called all-inclusive loans, made on real estate subject to prior
mortgage indebtedness. A wraparound mortgage loan is a mortgage loan having an
original principal amount equal to the outstanding balance under the prior
existing mortgage loan(s) plus the amount actually advanced under the
wraparound mortgage loan.
Wraparound mortgage loans may provide for full, partial or no amortization of
principal. The Trust's policy is to make wraparound mortgage loans in amounts
and on properties as to which it would otherwise make first mortgage loans. At
December 31, 1996, the Trust's mortgage notes receivable portfolio contained no
wraparound mortgage loans.
The following discussion briefly describes the wraparound mortgage loan funded
by the Trust in 1996.
In February 1996, the Trust sold the Rivertree Apartments in Hurst, Texas. In
conjunction with the sale, the Trust provided $750,000 in
22
<PAGE> 23
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
purchase money financing in the form of a wraparound mortgage note. The
wraparound mortgage note bore interest at 9% per annum, required monthly
payments of interest only and matured in November 1996. The loan was paid in
full in August 1996. See "Real Estate," above.
Junior Mortgage Loans. The Trust invests in junior mortgage loans. Such loans
are secured by mortgages that are subordinate to one or more prior liens either
on the fee or a leasehold interest in real estate. Recourse on such loans
ordinarily includes the real estate on which the loan is made, other collateral
and personal guarantees by the borrower. The Trust's Declaration of Trust
restricts investment in junior mortgage loans, excluding wraparound mortgage
loans, to not more than 10% of the Trust's assets. At December 31, 1996, less
than 1% of the Trust's assets were invested in junior mortgage loans.
The following discussion briefly describes the junior mortgage loan funded by
the Trust in 1996.
In February 1996, the Trust funded a $1.5 million second lien mortgage secured
by the Signature Athletic Club Building in Dallas, Texas. The note bears
interest at 12% per annum and requires monthly interest only payments to the
extent of available cash flow. Any accrued but unpaid interest is added to
the principal balance of the note annually. In addition, the note requires
quarterly principal payments equal to the property's excess cash flow for the
quarter. The note matures in October 1998 with an option to extend the note to
December 2000. The Trust has also guaranteed the underlying $3.0 million first
lien mortgage secured by the property, which is current. The Trust has an
option to purchase a 50% interest in the partnership which owns the Signature
Athletic Club Building for $100 at any time. The option expires in December
2005. The property has had no available cash flow, therefore, the Trust ceased
recognizing interest income effective June 1996.
Other. In July 1996, the Trust agreed to fund up to $500,000 on promissory
note secured by a contract to purchase land in Frisco, Texas. Through December
31, 1996, the Trust has funded $500,000. The note bears interest at 13% per
annum and all accrued interest and principal was due at the December 31, 1996
maturity date. The note's maturity was extended to March 30, 1997 upon payment
of all accrued interest.
Equity Investments in Real Estate Entities
In September 1990, the Trust's Board of Trustees authorized the purchase of up
to $2.0 million of the common stock of ART through negotiated or open market
transactions. The officers of the Trust also serve as officers of ART and BCM.
BCM, the Trust's advisor, also serves as advisor to ART. At March 7, 1997, ART
owned approximately 40.6% of the Trust's outstanding shares of beneficial
interest. At December 31, 1996, the Trust owned 818,088 shares of ART's common
stock, approximately 6.1% of ART's common shares outstanding, which the Trust
had purchased in open market transactions in 1990 and 1991, at a total
23
<PAGE> 24
ITEM 2. PROPERTIES (Continued)
Equity Investments in Real Estate Entities (Continued)
cost to the Trust of $1.6 million. The ART common stock owned by the Trust is
considered to be available for sale and accordingly, is carried at fair value
defined as the period end closing market value. At December 31, 1996, the
market value of the ART common stock was $5.3 million. See ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA."
In December 1990, the Trust's Board of Trustees authorized the purchase of up
to $1.0 million of the shares of beneficial interest of NIRT, a REIT that until
March 31, 1994, was also advised by BCM, and up to $1.0 million of the shares
of common stock of TCI through negotiated or open market transactions. The
Trustees of the Trust serve as directors of TCI and the officers of the Trust
also serve as officers of TCI. BCM, the Trust's advisor, also serves as
advisor to TCI. In December 1996, the Trust sold its NIRT shares to NIRT for
$1.1 million in cash. The Trust received net cash of $550,000 after the payoff
of margin debt secured by the NIRT shares. The Trust recognized a gain of
$725,000 on the sale. At December 31, 1996, the Trust owned 79,500 shares of
common stock of TCI acquired at a total cost to the Trust of $235,000 all of
which shares the Trust had purchased in open market transactions in 1990 and
1991. The Trust's investment in TCI is considered to be available for sale and
is carried at fair value. At December 31, 1996, the market value of the
Trust's investment in TCI's common shares was $875,000.
Under the original terms of its Declaration of Trust, the Trust was prohibited
from investing in equity securities for a period in excess of 18 months.
However, pursuant to an amendment to the Trust's Declaration of Trust approved
by the Trust's shareholders in May 1996, the Trust may hold any investments in
equity securities, including the shares of ART and TCI, without any limitation
on the holding period.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
In February 1990, the Trust, together with IORI, NIRT and TCI, three real
estate entities with, at the time, the same officers, directors or trustees and
advisor as the Trust, entered into a settlement of a class and derivative
action entitled Olive et al. v. National Income Realty Trust et al., in the
United State District Court for the Northern District of California, relating
to the operation and management of each of the entities. On April 23, 1990,
the Court granted final approval of the terms of a settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the Court on July 1, 1994 and final Court approval
was entered on December 12, 1994. The effective date of the Modification was
January 11, 1995.
24
<PAGE> 25
ITEM 3. LEGAL PROCEEDINGS (Continued)
Olive Litigation (Continued)
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, 1994, President of BCM until May 1, 1993 and director of BCM until
December 22, 1989, agreed to pay a total of $1.2 million to the Trust, IORI,
NIRT and TCI, of which the Trust's share was $750,000.
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 the then current members
of the Trust's Board of Trustees that stand for reelection during the two
calendar years following the effective date of the Modification and (ii) voted
in favor of all new members of the Trust's Board of Trustees appointed pursuant
to the terms of the Modification that stand for reelection during the three
calendar years following the effective date of the Modification.
Pursuant to the terms of the Modification, certain related party transactions
which the Trust may enter into prior to April 28, 1999, require the unanimous
approval of the Trust's Board of Trustees. In addition, such related party
transactions are to be discouraged and may only be entered into in exceptional
circumstances and after a determination by the Trust's Board of Trustees that
the transaction is in the best interests of the Trust and that no other
opportunity exists that is as good as the opportunity presented by such
transaction.
For purposes of the Modification requirements, the term "related party
transaction" means and includes (i) any transaction between or among the Trust
or IORI, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any
transaction between or among the Trust, its affiliates or subsidiaries and the
Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any
transaction between or among the Trust or any of its affiliates or subsidiaries
and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of
their affiliates has an ongoing or contemplated business or financial
transaction or relationship of any kind, whether direct or indirect, or has had
such a transaction or relationship in the preceding one year.
The Modification requirements for related party transactions do not apply to
direct contractual agreements for services between the Trust and the Advisor or
one of its affiliates, (including the Advisory Agreement, the Brokerage
Agreement and the property management contracts). These agreements require the
prior approval by two-thirds of the Trustees of the Trust, and if required,
approval by a majority of
25
<PAGE> 26
ITEM 3. LEGAL PROCEEDINGS (Continued)
Olive Litigation (Continued)
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. Friedman, the Advisor, or any affiliate of such parties. Such joint
ventures may be entered into on the affirmative vote of a majority of the
Trustees of the Trust.
The Modification also terminated a number of the provisions of the settlement,
including the requirement that the Trust, IORI, NIRT and TCI maintain a Related
Party Transaction Committee and a Litigation Committee of their respective
Boards. The Court 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 the 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, 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 Trust's Board of Trustees. As of March 7, 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, IORI, TCI and their shareholders released the defendants from any
claims relating to the 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
26
<PAGE> 27
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED
SHAREHOLDER MATTERS
The Trust's shares of beneficial interest are traded on The Nasdaq Stock Market
("Nasdaq") using the symbol "CMETs". The following table sets forth the high
and low prices as reported by the Nasdaq.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------ ----------- ------------
<S> <C> <C>
March 31, 1997
(through March 7, 1997).............. $ 12 1/2 $ 11
March 31, 1996........................ 10 1/2 9 5/8
June 30, 1996......................... 11 3/4 9 5/8
September 30, 1996.................... 11 1/2 10
December 31, 1996..................... 12 1/4 10 1/2
March 31, 1995........................ 10 3/16* 10 *
June 30, 1995......................... 10 11/16* 9 11/16*
September 30, 1995.................... 10 5/16* 9 11/16*
December 31, 1995..................... 10 1/2 * 9 11/16*
</TABLE>
_______________________
* Restated for the three for two forward share split effected February 15,
1996.
As of March 7, 1997, the closing price of the Trust's shares of beneficial
interest on the Nasdaq was $11.50 per share.
As of March 7, 1997, the Trust's shares of beneficial interest were held by
5,330 holders of record.
The Trust paid distributions in 1996 and 1995 as follows:
<TABLE>
<CAPTION>
Date Declared Record Date Payable Date Amount
- ---------------- ----------------- ----------------- ------
<S> <C> <C> <C>
March 1, 1996 March 15, 1996 March 31, 1996 $.13
June 3, 1996 June 14, 1996 June 28, 1996 .13
August 23, 1996 September 3, 1996 September 9, 1996 .13
August 23, 1996 September 3, 1996 September 9, 1996 .37*
December 2, 1996 December 13, 1996 December 31, 1996 .13
March 3, 1995 March 15, 1995 March 31, 1995 $.10**
May 22, 1995 June 15, 1995 June 30, 1995 .10**
August 25, 1995 September 15, 1995 September 30, 1995 .10**
November 30, 1995 December 15, 1995 December 31, 1995 .10**
</TABLE>
________________
* Special dividend.
** Restated for the three for two forward share split effected February 15,
1996.
27
<PAGE> 28
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED
SHAREHOLDER MATTERS (Continued)
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1996 represented capital gains and 100% of the
distributions paid in 1995 represented a return of capital.
On December 5, 1989, the Trust's Board of Trustees approved a program for the
Trust to repurchase its shares of beneficial interest. The Trust's Board of
Trustees has authorized the Trust to repurchase a total of 1,465,000 of its
shares of beneficial interest pursuant to such program. Through December 31,
1996, the Trust had repurchased 1,445,629 of its shares at a total cost to the
Trust of $7.7 million. In 1996, the Trust repurchased 267,904 of such shares
at a total cost to the Trust of $2.7 million.
In August 1996, the Trust announced an offer to buy back its shares of
beneficial interest from shareholders owning 99 or fewer shares. The Trust
paid a premium of $.50 per share over the average closing price of its shares
as reported on the Nasdaq from August 8, 1996 through September 30, 1996, the
expiration date of the offer. On October 17, 1996, the Trust repurchased
82,861 shares pursuant to such offer, at a total cost to the Trust of $912,000.
On March 24, 1989, the Trust distributed one share purchase right for each
outstanding share of beneficial interest of the Trust. On December 10, 1991,
the Trust's Board of Trustees voted to redeem the rights, having determined
that the rights were no longer necessary to protect the Trust from coercive
tender offers. In connection with such redemption, Messrs. Phillips and
Friedman and their affiliates, who owned approximately 28% of the Trust's
outstanding shares of beneficial interest at the time, agreed not to acquire
more than 40% of the Trust's outstanding shares of beneficial interest without
the prior action of the Trust's Board of Trustees to the effect that they do
not object to such increased ownership.
In August 1994, Mr. Phillips and his affiliates, primarily ART and BCM, owned
approximately 39.9% of the Trust's outstanding shares of beneficial interest.
This shareholder group desired to purchase additional shares of the Trust and
requested that the Trust's Board of Trustees consider the elimination of the
limitation on the percentage of shares which may be acquired by the shareholder
group. The Board of Trustees reviewed the limitation and determined that, due
to the fact that Mr. Friedman is no longer affiliated with the shareholder
group, and had disposed of any shares of the Trust which he or his affiliates
may have owned, the limitation should no longer apply to Mr. Friedman or his
affiliates. The Board of Trustees also determined that there was no reason to
object to the purchase of additional shares of the Trust by the shareholder
group and on August 23, 1994, the Trust's Board of Trustees adopted a
resolution to the effect that they do not object to the acquisition of up to
49% of the Trust's outstanding shares of beneficial interest by Mr. Phillips
and his affiliates. In determining total ownership, shares of beneficial
interest of the Trust, if any, owned by Mr. Friedman and his affiliates are no
longer to be included. Pursuant to this action, Mr. Phillips and his affiliates
could not
28
<PAGE> 29
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED
SHAREHOLDER MATTERS (Continued)
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 did not object to such increased ownership.
On March 21, 1996, the Trust's Board of Trustees reconsidered the share
ownership limitation and determined that there was no reason to object to the
purchase by Mr. Phillips and his affiliates of additional shares in excess of
49% of the Trust's outstanding shares. Accordingly, there is no longer any
limitation on the percentage of shares of the Trust which may be acquired by
Mr. Phillips and his affiliates. At March 7, 1997, Mr. Phillips and his
affiliates, primarily ART and BCM, owned approximately 53.4% of the Trust's
outstanding shares of beneficial interest.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- --------- --------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenues.................... $ 45,363 $ 38,309 $ 29,741 $ 24,288 $ 21,162
Expenses.................... 47,799 39,982 31,803 23,460 20,443
---------- ---------- ---------- --------- --------
Income (loss) from
operations.............. (2,436) (1,673) (2,062) 828 719
Equity in income (loss)
of partnerships......... 228 230 98 (213) (344)
Gain on sale of real
estate and marketable
equity securities....... 10,122 - 1,131 - 383
Extraordinary gain.......... 812 - - - -
---------- ---------- ---------- --------- --------
Net income (loss)........... $ 8,726 $ (1,443)$ (833) $ 615 $ 758
========== ========== ========== ======== ========
EARNINGS PER SHARE DATA
Income (loss) before
extraordinary gain....... $ 1.89 $ (.33) $ (.19) $ .13 $ .15
Extraordinary gain........... .19 - - - -
---------- ----------- ---------- ---------- --------
Net income (loss)............ $ 2.08 $ (.33) $ (.19) $ .13 $ .15
========== ========== ========= ========= ========
Distributions per share...... $ .89 $ .40 $ .40 $ .33 $ -
Weighted average
shares outstanding....... 4,199,147 4,377,165 4,379,722 4,521,384 5,058,762
</TABLE>
29
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable, net........ $ 7,074 $ 5,351 $ 7,117 $ 32,129 $ 34,590
Real estate held for
sale, net
Foreclosed............. 5,738 6,436 19,533 10,486 9,669
Other.................. - 1,268 - - -
Real estate held for
investment, net........ 214,460 174,713 124,706 94,440 78,170
Investment in
partnerships........... 2,293 12,970 13,805 14,079 14,537
Total assets............... 250,010 218,568 182,839 160,462 143,925
Notes and interest
payable................ 160,554 135,590 98,252 74,786 58,834
Shareholders' equity....... 79,183 75,985 78,767 81,139 81,985
Book value per share....... $ 19.67 $ 17.36 $ 17.99 $ 18.53 $ 17.13
</TABLE>
The Trust purchased thirteen properties in 1996 for a total of $67.5 million,
seven properties in 1995 for a total of $38.9 million and eight properties in
1994 for a total of $32.7 million. The Trust sold six properties in 1996 for a
total of $34.2 million and two properties in 1994 for a total of $2.6 million.
See ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Shares and per share data have been restated for the three for two forward
share split effected February 15, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Continental Mortgage and Equity Trust (the "Trust") was formed to invest in
real estate through acquisitions, leases and partnerships and in mortgage loans
on real estate, including wraparound, first and junior mortgage loans. The
Trust was organized on August 27, 1980 and commenced operations on December 3,
1980.
Liquidity and Capital Resources
Cash and cash equivalents totaled $3.0 million at December 31, 1996 compared
with $6.4 million at December 31, 1995. The principal reasons for this
decrease in cash are discussed in the paragraphs below.
The Trust's principal sources of cash have been and will continue to be from
property operations, proceeds from property sales, principal payments on
mortgage notes receivable and borrowings. The Trust expects that net cash
provided by operating activities and from anticipated external sources, such as
property sales, financings and refinancings, will be sufficient to meet the
Trust's various cash needs in 1997,
30
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
including, but not limited to, the payment of distributions, debt service
obligations coming due and property maintenance and improvements, as more fully
discussed in the paragraphs below.
The Trust's cash flow from property operations (rents collected less payments
for property operating expenses) increased from $15.1 million in 1995 to $19.3
million in 1996. Of this $4.2 million increase, $3.6 million is the result of
the Trust having acquired additional income producing properties, both through
purchase and foreclosure, and the remaining $900,000 is due to increased
occupancy and rental rates, primarily at its apartments, and the Trust's
control of operating expenses. These increases are partially offset by a
decrease of $1.5 million due to properties sold in 1995 and 1996. The Trust's
management believes that this trend will continue, particularly in the Trust's
apartments, if the economy remains stable or improves.
Interest collected on mortgage notes receivable decreased from $588,000 in 1995
to $575,000 in 1996. This decrease is primarily due to a loan which became
nonaccruing in 1996. Miscellaneous interest income increased from $100,000 in
1995 to $466,000 in 1996 due to increased dividend and short term investment
income. Interest is expected to decrease as a source of cash to the Trust as
the Trust has determined that generally, it will not actively seek to originate
new mortgage loans, other than those resulting from Trust provided purchase
money financing in connection with a property sale.
Interest paid on the Trust's notes payable increased from $6.6 million in 1994
to $8.9 million in 1995 to $11.3 million in 1996. This increase is primarily
attributable to interest paid on mortgages secured by properties acquired in
1994, 1995 and 1996, of 11 properties, 8 properties and 13 properties,
respectively, and interest paid on borrowings in 1995 and 1996 secured by
mortgages on previously unencumbered properties. The Trust believes that
interest paid on notes payable will continue to increase in 1997 if the Trust
continues to acquire additional properties and/or obtain financing on
unencumbered properties.
The Trust was involved in significant investing activities during 1996. The
Trust purchased four apartment complexes, eight commercial properties and one
parcel of undeveloped land during 1996, for which the Trust paid a total of
$67.6 million. The Trust paid $25.4 million in cash, with the remaining $42.2
million financed through new or assumed mortgage debt. The Trust also made
improvements to its properties totaling $3.0 million. The Trust sold five
apartment complexes and one parcel of undeveloped land during 1996 for $34.2
million. The Trust received $30.2 million in cash after the payoff of existing
mortgage debt and the payment of various closing costs associated with the
sales. In addition, the Trust collected $837,000 on its mortgage notes
receivable, primarily from the payoff of one note of $750,000, with the
31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
remainder being collected from scheduled paydowns on the Trust's other mortgage
notes receivable. The Trust also funded in 1996, two mortgage loans for a
total of $2.0 million.
During 1996, the Trust received net financing proceeds of $4.1 million from
mortgage financing secured by two previously unencumbered apartment complexes.
In addition, the Trust refinanced the mortgages secured by seven other
apartment complexes. The Trust received a total of $5.6 million in net cash
proceeds after the payoff of $23.5 million in existing mortgage debt and the
payment of various closing costs associated with the financings. Also during
1996, the Trust made scheduled principal payments on mortgages totaling $8.0
million.
In December 1996, the Trust sold its equity investment in National Income
Realty Trust ("NIRT") to NIRT for $1.1 million in cash. The Trust received net
cash of $550,000 after payoff of related margin debt.
The Trust has been paying quarterly distributions since the first quarter of
1993. In 1995, the Trust paid distributions to its shareholders of $.40 per
share or a total of $1.8 million. In 1996, the Trust paid regular and special
distributions to its shareholders of $.89 per share or a total of $3.8 million.
During the first quarter of 1997, the Trust has continued to be an active
investor. The Trust has purchased an office building, an apartment complex and
a parcel of unimproved land, for a total of $18.4 million, the Trust paying $6.6
million in cash with the remainder of the purchase prices financed through
mortgage debt. The Trust derived the cash portions of these acquisitions from
its cash on hand at December 31, 1996 and short term advances from the Trust's
advisor. Such advances being repaid upon the receipt of debt financing
proceeds of borrowings secured by previously unencumbered properties of the
Trust.
Pursuant to a repurchase program originally announced by the Trust on December
5, 1989, the Trust's Board of Trustees authorized the Trust to repurchase a
total of 1,465,000 of its shares of beneficial interest. Through December 31,
1996, the Trust had repurchased 1,445,629 of its shares at a total cost to the
Trust of $7.7 million. In 1996, the Trust repurchased 267,904 of such shares
at a total cost to the Trust of $2.7 million with 19,371 shares remaining to be
repurchased.
In August 1996, the Trust announced an offer to buy back its shares of
beneficial interest from shareholders owning 99 or fewer shares. The Trust
paid a premium of $.50 per share over the average closing price of its shares
as reported on the Nasdaq from August 8, 1996 through September 30, 1996, the
expiration date of the offer. On October 17, 1996, the Trust repurchased
82,861 shares pursuant to such offer, at a total cost to the Trust of $912,000.
The Trust's management reviews the carrying values of the Trust's properties
and mortgage notes receivable at least annually and whenever
32
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
events or a change in circumstances indicate that impairment may exist.
Impairment is considered to exist if, in the case of a property, the future
cash flow from the property (undiscounted and without interest) is less than
the carrying amount of the property. For notes receivable impairment is
considered to exist if it is probable that all amounts due under the terms of
the note will not be collected. In those instances where impairment is found
to exist, a provision for loss is recorded by a charge against earnings. The
Trust's mortgage note receivable review includes an evaluation of the
collateral property securing such note. The property review generally includes
selective property inspections, a review of the property's current rents
compared to market rents, a review of the property's expenses, a review of
maintenance requirements, a review of the property's cash flow, discussions
with the manager of the property and a review of properties in the surrounding
area.
Results of Operations
1996 Compared to 1995. For the year 1996, the Trust had net income of $8.7
million, compared to a net loss of $1.4 million for the year 1995. The Trust's
1996 net income includes gains on the sale of real estate and marketable equity
securities of $10.1 million and an extraordinary gain of $812,000. The Trust
recognized no such gains in 1995. The primary factors contributing to the
Trust's net income in 1996 are discussed in the following paragraphs.
Rents increased from $37.6 million in 1995 to $44.2 million in 1996. Of this
increase, $8.5 million is attributable to the acquisition of eight apartment
complexes and eleven commercial properties during 1995 and 1996. This increase
is partially offset by a decrease of $3.0 million attributable to the five
apartment complexes sold in 1996. The remaining increase is due primarily to
increases in rental and occupancy rates, primarily at the Trust's apartment
properties. Rents are expected to increase in 1997 due to a full year of
operations for properties acquired in 1996 and from the properties acquired in
the first quarter of 1997.
Interest income was $723,000 in 1995 compared to $1.1 million in 1996. Of this
increase, $114,000 is due to the funding of two mortgage loans for a total of
$2.0 million and a $750,000 purchase money note accepted by the Trust in
February 1996 in conjunction with the sale of the Rivertree Apartments which
was paid in full in August 1996. An additional increase of $366,000 is due to
increased short-term investment income. Interest income is expected to
decrease in 1997 due to note maturities, payoffs and notes placed on non-
accrual status. See NOTE 2. "NOTES AND INTEREST RECEIVABLE."
Property operating expenses increased from $22.7 million in 1995 to $26.7
million in 1996. An increase of $4.9 million is due to the acquisition of
eight apartment complexes and eleven commercial properties during 1995 and
1996. The remainder of the increase is primarily due to increased repair and
maintenance and personnel expenses
33
<PAGE> 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
in an effort to maintain and increase the Trust's rental and occupancy rates.
These increases are partially offset by a decrease of $1.5 million due to
properties sold in 1996. Property operating expenses are expected to increase
in 1997 due to a full year of operations of the properties acquired in 1996 and
from the properties acquired in the first quarter of 1997.
Interest expense increased from $10.0 million in 1995 to $12.8 million in 1996.
Of this increase, $2.9 million is due to interest expense recorded on mortgages
secured by twelve properties, encumbered by debt, acquired during 1996 and
1995. An additional $805,000 is due to interest expense recorded on borrowings
during 1996 and 1995, secured by mortgages on three previously unencumbered
apartment complexes and one industrial warehouse and the refinancing of six
mortgages where the loan balance was increased. This increase is partially
offset by a decrease of $1.0 million due to the sale of five apartment
complexes and the return of one property to the lender in 1996. Interest
expense is expected to increase in 1997, as a result of a full year of interest
expense on properties acquired or refinanced in 1996 and the properties
acquired in the first quarter of 1997.
Depreciation expense increased from $4.3 million in 1995 to $4.8 million in
1996. Of this increase, $1.9 million is due to the acquisition of eight
apartment complexes and eleven commercial properties during 1996 and 1995.
This increase is partially offset by a decrease of $496,000 due to the sale of
five apartment complexes in 1996. Depreciation is expected to increase in
1997, as a result of a full year of depreciation on the properties acquired in
1996 and the properties acquired in the first quarter of 1997.
A provision for losses of $541,000 was recognized in 1995 to provide for the
loss on the discounted payoff of the mortgage note receivable secured by an
apartment complex. A negative provision for losses of $884,000 was recognized
in 1996. Such negative provision represents accrued interest recorded on a
mortgage between February 1995, the date the Trust stopped making payments on
the mortgage, and September 1996 when the collateral property was transferred
to the lender. See NOTE 7. "NOTES AND INTEREST PAYABLE."
Advisory fee to affiliate was comparable at $1.1 million in 1996 and $1.3
million in 1995. Although the Trust's gross assets, the basis for the advisory
fee, increased in 1996, the Trust's Declaration of Trust requires a portion of
the advisory fee be refunded if certain operating expenses, as defined, exceed
limits specified in the Declaration of Trust. The effect of this limitation
was to require the Trust's Advisor refund $589,000 of the annual advisory fee
for 1996.
Net income and incentive sales fees of $1.0 million were earned by the Trust's
Advisor in 1996. Such fees are the result of the Trust recognizing gains
totaling $9.4 million from the sale of three apartment complexes, as discussed
below. No such fees were earned by the Trust's Advisor in 1995.
34
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
General and administrative expenses increased from $1.2 million in 1995 to $2.2
million in 1996. This increase is primarily attributable to an increase in
legal fees related to the Olive Litigation (See NOTE 15. "COMMITMENTS AND
CONTINGENCIES - Olive Litigation.") and Advisor cost reimbursements.
The Trust's equity in earnings of partnerships was $228,000 in 1996 compared to
$230,000 in 1995. Included in equity earnings of partnerships in 1996 is a
gain on sale of real estate of $370,000, the Trust's equity share of the gain
recognized by Indcon, L.P. ("Indcon"), a joint venture partnership, on the sale
of 27 of its industrial warehouses. See NOTE 6. "INVESTMENTS IN PARTNERSHIPS."
Without such gain the Trust's equity in earnings of partnerships would have
been a loss of $143,000. Such decrease is primarily due to the sale of the 27
industrial warehouses in the first quarter of 1996. In addition, interest
expense for Sacramento Nine ("SAC 9"), also a joint venture partnership,
increased as a result of mortgage financing secured in August 1995, on a
previously unencumbered office building. See NOTE 6. "INVESTMENTS IN
PARTNERSHIPS." Equity in earnings of partnerships is expected to be minimal in
1997.
In 1996, the Trust recognized gains on the sale of real estate of $378,000 on
the sale of Rivertree Apartments in February 1996, $5.4 million on the sale of
Sunset Towers Apartments in May 1996 and $3.6 million on the sale of Southgate
Apartments in August 1996. See NOTE 4. "REAL ESTATE." In 1996, the Trust
also recognized a gain of $725,000 on the sale of its equity investment in
NIRT. See NOTE 5. "INVESTMENT IN MARKETABLE EQUITY SECURITIES." The Trust had
no such gains in 1995.
In 1996, the Trust recognized an extraordinary gain of $149,000 representing an
insurance settlement at the Rivertree Apartments which the Trust had sold in
February 1996. See NOTE 4. "REAL ESTATE AND DEPRECIATION." Also in 1996, the
Trust recognized an extraordinary gain of $663,000, its equity share of an
insurance settlement from a fire loss on an industrial warehouse owned by
Indcon. See NOTE 6. "INVESTMENTS IN EQUITY METHOD PARTNERSHIPS." The Trust
recognized no extraordinary gains in 1995.
1995 compared to 1994. For the year 1995, the Trust had a net loss of $1.4
million, as compared to a net loss of $833,000 for the year 1994. The primary
factors contributing to the increase in the Trust's net loss are discussed in
the following paragraphs.
Net rental income (rents less expenses applicable to rents) increased from
$10.2 million in 1994 to $14.9 million in 1995. Of this increase, $1.8 million
is due to the acquisition of four apartment complexes and three commercial
properties in 1995, $1.7 million is due to the acquisition of seven apartment
complexes and one commercial property in 1994, which did not contribute to net
rental income for the full year in 1994, and $804,000 of the increase is
attributable to two apartment
35
<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
complexes obtained through foreclosure in 1994. An additional increase of
$640,000 is attributable to generally higher rents and occupancy at the Trust's
apartment complexes. These increases are offset in part by a $244,000 decrease
in net rental income at one of the Trust's commercial properties and one of the
Trust's apartment complexes due to a decrease in occupancy and higher
operating expenses incurred in an effort to increase occupancy.
Interest income decreased from $2.7 million in 1994 to $723,000 in 1995. Of
this decrease, $1.7 million is attributable to a $14.0 million wraparound
mortgage note receivable which was paid in full in December 1994 and $99,000 is
attributable to the discounted payoff of a $1.5 million first mortgage note
receivable in May 1995. An additional $486,000 is due to the foreclosure of
two properties during 1994 and one property during 1995 which secured three of
the Trust's other mortgage notes receivable. These decreases are partially
offset by an increase of $299,000 attributable to a $1.4 million first mortgage
note receivable which was received in December 1994 in connection with the
payoff of the $14.0 million mortgage note receivable discussed above.
Interest expense increased from $7.7 million in 1994 to $10.0 million in 1995.
Of this increase, $2.4 million is due to interest expense recognized on
mortgages secured by properties acquired in 1994 and 1995. An additional
$766,000 is due to interest expense on six borrowings in 1994 and 1995, secured
by mortgages on previously unencumbered apartment complexes and refinancing of
existing mortgages. These increases are partially offset by a decrease of
$855,000 due to the payoff of the underlying lien related to the payoff of a
$14.0 million wraparound mortgage note receivable in December 1994.
Depreciation expense increased from $3.2 million in 1994 to $4.3 million in
1995. This increase is due to the acquisition of four apartment complexes and
three commercial properties in 1995 and seven apartment complexes and one
commercial property in 1994.
A provision for losses of $541,000 was recorded in 1995 to provide for the loss
on the discounted payoff of the mortgage note receivable secured by an
apartment complex. A provision for losses of $1.2 million was recorded in 1994
to write down an office building to the amount of the nonrecourse mortgage
debt. In addition, a provision for losses of $200,000 was recorded in 1994 to
provide for the loss on the sale of an apartment complex, one of the Trust's
foreclosed properties held for sale. See NOTE 4. "REAL ESTATE AND
DEPRECIATION."
Advisory fee to affiliate was comparable at $1.3 million in 1995 and 1994.
Although the Trust's gross assets, the basis for the advisory fee, increased in
1995, the Trust's Declaration of Trust requires a portion of the advisory fee
be refunded if certain operating expenses, as defined, exceed limits specified
in the Declaration of Trust. The effect of this limitation was to require that
BCM refund $250,000 of the annual advisory fee for 1995. See NOTE 9. "ADVISORY
AGREEMENT."
36
<PAGE> 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
General and administrative expenses were comparable at $1.2 million in 1995 and
1994. A decrease in legal fees was offset by expenses incurred in connection
with the Trust's annual meeting.
The Trust's equity in earnings of partnerships improved from $98,000 in 1994 to
$230,000 in 1995. Included in the 1994 equity in earnings of partnerships is a
$577,000 gain on sale of real estate, the Trust's equity share of the gain
recognized by Indcon, L.P. ("Indcon"), a joint venture partnership, on the sale
of one of its industrial warehouses. Excluding such gain, the Trust's equity
in earnings of partnerships would have been a loss of $479,000 in 1994. The
improvement in equity earnings of partnerships in 1995 over 1994 is primarily
due to higher rents and occupancy at the 31 industrial warehouses owned by
Indcon. This improvement is partially offset by an increase in losses in
Sacramento Nine ("SAC 9"), also a joint venture partnership, due to increased
interest expense, as a result of new mortgage financing secured by a previously
unencumbered office building. In February and March 1996, Indcon completed the
sale of 25 of its 31 industrial warehouses. See NOTE 6. "INVESTMENT IN EQUITY
METHOD PARTNERSHIPS."
For the year 1994, the Trust recognized a gain of $1.1 million on the
settlement of a profit participation related to the December 1994 payoff of one
of the Trust's wraparound mortgage note receivable. See NOTE 2. "NOTES AND
INTEREST RECEIVABLE."
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Trust for personal injury
associated with such materials.
The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets or results of operations.
Inflation
The effects of inflation on the Trust's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with increases and
decreases in housing costs. Fluctuations in the rate of inflation also affect
the sales values of properties and, correspondingly, the ultimate gains to be
realized by the Trust from property sales. Inflation also has an effect on
the Trust's earnings from short-term investments.
37
<PAGE> 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Tax Matters
For the years ended December 31, 1996, 1995 and 1994, the Trust elected and in
the opinion of the Trust's management, qualified to be treated as a REIT as
defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"). To continue to qualify for federal taxation as a REIT
under the Code, the Trust is required to hold at least 75% of the value of its
total assets in real estate assets, government securities, cash and cash
equivalents at the close of each quarter of each taxable year. The Code also
requires a REIT to distribute at least 95% of its REIT taxable income plus 95%
of its net income from foreclosure property, as defined in Section 857 of the
Code, on an annual basis to shareholders.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified as held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not to be depreciated. The Trust adopted SFAS No. 121 effective
January 1, 1996.
The effect of adopting SFAS No. 121 was the discontinuance of depreciation on
the Trust's real estate held for sale of $81,000, and a corresponding increase
in its reported net income in 1996.
38
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Continental Mortgage and Equity Trust
Report of Independent Certified Public Accountants........... 40
Consolidated Balance Sheets -
December 31, 1996 and 1995................................. 41
Consolidated Statements of Operations -
Years Ended December 31, 1996, 1995 and 1994............... 42
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1996, 1995 and 1994............... 43
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and 1994............... 44
Notes to Consolidated Financial Statements................... 47
Schedule III - Real Estate and Accumulated Depreciation....... 68
Schedule IV - Mortgage Loans on Real Estate................. 72
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Financial Statements
or the notes thereto.
39
<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees of
Continental Mortgage and Equity Trust
We have audited the accompanying consolidated balance sheets of Continental
Mortgage and Equity Trust and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
We have also audited the schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedules. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Continental Mortgage and Equity Trust and Subsidiaries as of December 31, 1996
and 1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Dallas, Texas
March 7, 1997
40
<PAGE> 41
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
--------- ---------
Assets (dollars in thousands)
<S> <C> <C>
Notes and interest receivable
Performing .............................................. $ 6,268 $ 4,240
Nonperforming, nonaccruing .............................. 2,287 2,299
--------- ---------
8,555 6,539
Less - allowance for estimated losses ...................... (1,481) (1,188)
--------- ---------
7,074 5,351
Foreclosed real estate held for sale, net of
accumulated depreciation ($725 in 1996 and
$738 in 1995) ........................................... 5,738 11,553
Real estate under contract for sale net of
accumulated depreciation ($602 in 1995) ................. -- 1,268
Less - allowance for estimated losses ...................... -- (5,117)
--------- ---------
5,738 7,704
Real estate held for investment, net of
accumulated depreciation ($16,713 in 1996
and $16,395 in 1995) .................................... 214,460 174,713
Investment in marketable equity securities,
at market (including $6,192 in 1996 and
$3,812 in 1995 of affiliates) ........................... 6,192 4,753
Investment in partnerships ................................. 2,293 12,970
Cash and cash equivalents .................................. 2,961 6,386
Other assets (including $650 in 1996 and
$469 in 1995 from affiliates) ........................... 11,292 6,691
--------- ---------
$ 250,010 $ 218,568
========= =========
Liabilities and Shareholders' Equity
Liabilities
Notes and interest payable ................................. $ 160,554 $ 135,590
Other liabilities (including $1,318 in 1996 and
$923 in 1995 to affiliates) ............................. 10,273 6,993
--------- ---------
170,827 142,583
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value;
authorized shares, unlimited;
issued and outstanding, 4,026,376 shares in 1996 and
4,377,141 shares in 1995 ................................ 8,068 8,766
Paid-in capital ............................................ 257,159 260,060
Accumulated distributions in excess of
accumulated earnings .................................... (190,931) (195,870)
Net unrealized gains on marketable equity
securities .............................................. 4,887 3,029
--------- ---------
79,183 75,985
--------- ---------
$ 250,010 $ 218,568
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
41
<PAGE> 42
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(dollars in thousands, except per share)
Revenues
<S> <C> <C> <C>
Rents ................................ $ 44,244 $ 37,586 $ 27,042
Interest ............................. 1,119 723 2,699
----------- ----------- -----------
45,363 38,309 29,741
Expenses
Property operations (including
$975 in 1996, $806 in 1995 and
$570 in 1994 to affiliates) ....... 26,738 22,682 16,888
Interest ............................. 12,773 10,009 7,711
Depreciation ......................... 4,819 4,279 3,214
Provision for losses ................. (884) 541 1,429
Advisory fee to affiliate ............ 1,091 1,264 1,326
Incentive and net income fees ........ 1,049 -- --
General and administrative
(including $825 in 1996, $506
in 1995 and $524 in 1994 to
affiliate) ........................ 2,213 1,207 1,235
----------- ----------- -----------
47,799 39,982 31,803
----------- ----------- -----------
(Loss) from operations .................. (2,436) (1,673) (2,062)
Equity in income of partnerships ........ 228 230 98
Gain on sale of real estate and
marketable equity securities ......... 10,122 -- 1,131
----------- ----------- -----------
Income (loss) before extraordinary
gain ................................. 7,914 (1,443) (833)
Extraordinary gain ...................... 812 -- --
----------- ----------- -----------
Net income (loss) ....................... $ 8,726 $ (1,443) $ (833)
=========== =========== ===========
Earnings per share
Income (loss) before extraordinary
gain ................................. $ 1.89 $ (.33) $ (.19)
Extraordinary gain ...................... .19 -- --
----------- ----------- -----------
Net income (loss) ....................... $ 2.08 $ (.33) $ (.19)
=========== =========== ===========
Weighted average shares of
beneficial interest used in
computing earnings per share ......... 4,199,147 4,377,165 4,379,722
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
<PAGE> 43
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Unrealized
Distributions Gains on
Shares of in Excess of Marketable
Beneficial Interest Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ........ 4,386,283 8,784 260,126 (190,091) 2,363 81,182
Repurchase of shares of
beneficial interest .......... (9,084) (18) (66) -- -- (84)
Distributions ($.40 per
share) ....................... -- -- -- (1,752) -- (1,752)
Unrealized gains on market-
able equity securities ....... -- -- -- -- 254 254
Net (loss) ...................... -- -- -- (833) -- (833)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1994 ..... 4,377,199 8,766 260,060 (192,676) 2,617 78,767
Fractional shares of
beneficial interest
acquired ..................... (58) -- -- -- -- --
Distributions ($.40 per
share) ....................... -- -- -- (1,751) -- (1,751)
Unrealized gains on market-
able equity securities ....... -- -- -- -- 412 412
Net (loss) ...................... -- -- -- (1,443) -- (1,443)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 ..... 4,377,141 8,766 260,060 (195,870) 3,029 75,985
Repurchase of shares of
beneficial interest .......... (350,765) (698) (2,901) -- -- (3,599)
Distributions ($.89 per
share) ....................... -- -- -- (3,787) -- (3,787)
Unrealized gains on market-
able equity securities ....... -- -- -- -- 1,858 1,858
Net income ...................... -- -- -- 8,726 -- 8,726
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 ..... 4,026,376 $ 8,068 $ 257,159 $ (190,931) $ 4,887 $ 79,183
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
43
<PAGE> 44
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------- -------- --------
1996 1995 1994
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rents collected ............................ $ 43,497 $ 37,610 $ 27,155
Interest collected ......................... 1,041 688 2,171
Interest paid .............................. (11,259) (8,937) (6,559)
Payments for property operations
(including $975 in 1996, $767 in
1995 and $570 in 1994 to
affiliates) ............................. (24,200) (22,520) (16,425)
General and administrative expenses
paid (including $825 in 1996,
$506 in 1995 and $524 in 1994 to
affiliates) ............................. (1,414) (1,352) (1,327)
Advisory fee paid to affiliate ............. (1,740) (1,514) (1,305)
Distributions from partnerships'
operating cash flow ..................... 848 41 191
Other ...................................... 16 524 (888)
-------- -------- --------
Net cash provided by operating
activities ......................... 6,789 4,540 3,013
Cash Flows from Investing Activities
Acquisitions of real estate
(including $2,795 in 1996, $1,723
in 1995 and $1,396 in 1994 to
affiliates) ............................. (31,854) (9,766) (9,896)
Collections on notes receivable ............ 837 1,081 5,585
Fundings of notes receivable ............... (2,000) -- (283)
Proceeds from sale of real estate .......... 14,939 33 2,166
Proceeds from sale of marketable
equity securities ....................... 554 -- --
Real estate improvements ................... (3,019) (1,170) (729)
Funding of capital improvement escrow ...... (1,500) -- --
Distributions from partnerships'
investing cash flow ..................... 10,720 -- 1,275
Deferred financing costs ................... (2,183) -- --
-------- -------- --------
Net cash (used in) investing
activities ......................... (13,506) (9,822) (1,882)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
44
<PAGE> 45
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from notes payable ............... $ 34,596 $ 12,506 $ 10,078
Payments on notes payable ................. (23,918) (7,590) (3,666)
Distributions to shareholders ............. (3,787) (1,751) (1,752)
Repurchase of shares of beneficial
interest ............................... (3,599) -- (84)
Distributions from partnerships'
financing cash flows ................... -- 1,025 --
-------- -------- --------
Net cash provided by financing
activities ....................... 3,292 4,190 4,576
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents .......................... (3,425) (1,092) 5,707
Cash and cash equivalents, beginning
of year ................................... 6,386 7,478 1,771
-------- -------- --------
Cash and cash equivalents, end of
year ...................................... $ 2,961 $ 6,386 $ 7,478
======== ======== ========
Reconciliation of net income (loss) to
net cash provided by operating
activities
Net income (loss) ...................... $ 8,726 $ (1,443) $ (833)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities
Gain on sale of real estate and
marketable equity securities ........ (10,122) -- (1,131)
Extraordinary gain ..................... (812)
Depreciation and amortization .......... 4,795 4,240 3,307
Equity in (income) of
partnerships ........................ (228) (230) (98)
Provision for losses ................... (884) 541 1,429
(Increase) decrease in interest
receivable .......................... (53) (1) 309
(Increase) decrease in other
assets .............................. 69 432 (785)
Increase in other liabilities .......... 3,598 204 468
Increase in interest payable ........... 852 756 156
Distributions from partnerships'
operating cash flow ................. 848 41 191
-------- -------- --------
Net cash provided by
operating activities .......... $ 6,789 $ 4,540 $ 3,013
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
45
<PAGE> 46
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---------- ------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Schedule of noncash investing activities
Carrying value of real estate obtained
in satisfaction of notes receivable
(with carrying values totaling
$891 in 1995 and $10,095 in 1994) ....... $ -- $ 891 $11,242
Mortgage notes receivable from real
estate sales ............................ 750 -- 365
Notes payable from acquisition of
real estate ............................. 6,086 31,022 23,631
Prior existing loan assumed by
borrower ................................ -- -- 9,000
Permanent write down of real estate
held for investment ..................... -- -- 1,229
Interest on wraparound mortgage note
receivable paid directly to
underlying lienholder ................... -- -- 855
Unrealized gains on marketable equity
securities .............................. 1,858 412 254
Mortgage note receivable from
settlement of profit participation ...... -- -- 1,414
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
46
<PAGE> 47
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Continental Mortgage and
Equity Trust and consolidated entities (the "Trust") have been prepared in
conformity with generally accepted accounting principles, the most significant
of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES".
These, along with the remainder of the Notes to the Consolidated Financial
Statements, are an integral part of the Consolidated Financial Statements. The
data presented in the Notes to Consolidated Financial Statements are as of
December 31 of each year and for the year then ended, unless otherwise
indicated. Dollar amounts in tables are in thousands, except per share amounts.
Certain balances for 1995 and 1994 have been reclassified to conform to the
1996 presentation. Shares and per share data have been restated for the three
for two forward share split effected February 15, 1996.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. Continental Mortgage and Equity Trust ("CMET")
is a California business trust organized on August 27, 1980. The Trust may
invest in real estate through direct ownership, leases and partnerships and it
may also invest in mortgage loans on real estate, including first, wraparound
and junior mortgage loans.
On October 25, 1996, the Trust's Board of Trustees approved a proposal to
convert the Trust from a California business trust into a Nevada corporation.
The Trust's Board of Trustees believes that the change from a California
business trust to a Nevada corporation will afford the Trust greater legal
certainty in matters of corporate governance and indemnification and therefore
greater predictability in the conduct of its business as a corporation under
Nevada law. The Trust has filed a Proxy Statement/Prospectus with the
Securities and Exchange Commission providing for a special meeting of the
Trust's shareholders. At such meeting the Trust's shareholders will vote on
this proposal. Approval requires the vote of a majority of the Trust's
outstanding shares of beneficial interest. As of March 7, 1997 the Trust's
advisor and its affiliates held shares representing approximately 53.4% of the
Trust's outstanding shares. A date for the special meeting of the Trust's
shareholders to vote on the incorporation proposal has not been set.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of CMET and partnerships and subsidiaries which it controls. All
intercompany transactions and balances have been eliminated.
Accounting estimates. In the preparation of the Trust's Consolidated Financial
Statements in conformity with generally accepted accounting principles it was
necessary for the Trust's management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the
47
<PAGE> 48
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
date of the Consolidated Financial Statements and the reported amounts of
revenues and expenses for the year then ended. Actual results could differ from
these estimates.
Interest recognition on notes receivable. It is the Trust's policy to cease
recognizing interest income on notes receivable that have been delinquent for
60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for estimated
losses on notes receivable considered to be impaired. Impairment is considered
to exist when it is probable that all amounts due under the terms of the note
will not be collected. Valuation allowances are provided for estimated losses
on notes receivable to the extent that the Trust's investment in the note
exceeds the Trust's estimate of net realizable value of the collateral securing
such note, or fair value of the collateral if foreclosure is probable.
Real Estate Held for Investment and Depreciation. Real estate held for
investment is carried cost. Statement of Financial Accounting Standards No. 121
("SAFS No. 121") requires that a property be considered impaired, if the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the property. If impairment exists, an
impairment loss is recognized, by a charge against earnings, equal to the
amount by which the carrying amount of the property exceeds the fair value of
the property. If impairment of a property is recognized, the carrying amount of
the property is reduced by the amount of the impairment, and a new cost for the
property is established. Such new cost is depreciated over the property's
remaining useful life. Depreciation is provided by the straight-line method
over estimated useful lives, which range from 5 to 40 years.
Real Estate Held for Sale. Foreclosed real estate is initially recorded at new
cost, defined as the lower of original cost or fair value minus estimated costs
of sale. SFAS No. 121 also requires that properties held for sale be reported
at the lower of carrying amount or fair value less costs of sale. If a
reduction in a held for sale property's carrying amount to fair value less
costs of sale is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale property's estimated fair value less costs of sale is recorded as an
adjustment to the property's carrying amount, but not in excess of the
property's carrying amount when originally classified as held for sale. A
corresponding charge against or credit to earnings is recognized. Properties
held for sale are not to be depreciated.
48
<PAGE> 49
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Present value discounts. The Trust provides for present value discounts on notes
receivable or payable that have interest rates that differ substantially from
prevailing market rates and amortizes such discounts by the interest method over
the lives of the related notes. The factors considered in determining a market
rate for notes receivable include the borrower's credit standing, nature of the
collateral and payment terms of the note.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment, the cost recovery or the financing method, whichever is
appropriate.
Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships which it does not control. Under the
equity method, the Trust's initial investment, recorded at cost, is increased
by the Trust's proportionate share of the partnership's operating income and
additional advances and decreased by the Trust's share of the partnership's
operating losses and distributions received.
Marketable equity securities. Marketable equity securities are considered to be
available-for-sale and are carried at fair value, defined as period end closing
market value. Net unrealized holding gains and losses are reported as a
separate component of shareholders' equity until realized.
Fair value of financial instruments. The Trust used the following assumptions
in estimating the fair value of its notes receivable, marketable equity
securities and notes payable. For performing notes receivable, the fair value
was estimated by discounting future cash flows using current interest rates for
similar loans. For nonperforming notes receivable, the estimated fair value of
the Trust's interest in the collateral property was used. For marketable equity
securities, fair value was based on the year end closing market price of each
security. For notes payable, the fair value was estimated using current rates
for mortgages with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Trust considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Earnings per share. Income (loss) per share of beneficial interest is computed
based upon the weighted average number of shares of beneficial interest
outstanding during each year, adjusted for the three for two forward share
split effected February 15, 1996.
49
<PAGE> 50
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------------------------ -----------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Notes receivable
Performing.................. $ 6,911 $ 6,555 $ 4,697 $ 4,640
Nonperforming, nonaccruing.. 2,100 2,100 2,100 2,100
-------------- ------------ ------------ -------------
$ 9,011 8,655 $ 6,797 6,740
============== ============
Unamortized (discounts)....... (351) (374)
Deferred gain................. (67) (67)
Interest receivable........... 318 240
------------ -------------
$ 8,555 $ 6,539
============ =============
</TABLE>
The Trust does not recognize interest income on nonperforming notes receivable.
For the years 1996, 1995 and 1994, unrecognized interest income on
nonperforming notes totaled $193,000, $554,000 and $1.3 million, respectively.
Notes receivable at December 31, 1996 mature from 1997 through 2018, with
interest rates ranging from 6.5% to 13% and a weighted average rate of 7.5%.
Discounts are based on an imputed interest rate of 12%. Notes receivable are
nonrecourse and are collateralized by real estate.
At December 31, 1994, the $1.5 million mortgage note receivable secured by an
apartment complex in Detroit, Michigan was in default. In May 1995, the Trust
accepted $1.0 million in cash in full satisfaction of the mortgage note. A
provision for loss of $541,000 was recognized in the first quarter of 1995, to
provide for the loss on the discounted payoff of the mortgage note.
At December 31, 1996, two of the Trust's mortgage notes receivable with
principal balances totaling $2.1 million were in default. One of the notes,
with a principal balance of $1.4 million, matured in November 1995. The
borrower has been negotiating with the Trust for an extension of the note in
return for a principal paydown and payment of all accrued interest. In February
1997, the Trust received a payment of $470,000 from the borrower, $305,000
being applied against accrued interest and $165,000 applied to reduce the
principal balance of the note. The Trust does not anticipate incurring a loss
on this note as the estimated fair value of the property securing the note is
in excess of the carrying value of the note. The other note, with a principal
balance of $700,000, matured in July 1993. The Trust continues to receive
partial interest payments monthly on the note. The Trust is evaluating its
options with respect to foreclosure of the collateral property and does not
anticipate incurring a loss on this note in excess of previously established
reserves.
50
<PAGE> 51
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
In February 1996, the Trust funded a $1.5 million second lien mortgage secured
by the Signature Athletic Club Building in Dallas, Texas. The note bears
interest at 12% per annum and requires monthly interest only payments to the
extent of available cash flow. Any accrued but unpaid interest is added to the
principal balance of the note annually. In addition, the note requires
quarterly principal payments equal to the excess property cash flow for the
quarter. The note matures in October 1998 with an option to extend the note to
December 2000. The Trust has also guaranteed the underlying $3.0 million first
mortgage secured by the property, which is current. The Trust has an option to
purchase a 50% interest in the partnership which owns the Signature Athletic
Club Building. The option expires in December 2005. The property has had no
available cash flow, therefore the Trust ceased recognizing interest income
effective June 1996.
In July 1996, the Trust agreed to fund a $500,000 promissory note secured by a
contract to purchase land in Frisco, Texas. Through December 31, 1996, the
Trust has funded $500,000. The note bears interest at 13% per annum and all
interest and principal was payable at the December 31, 1996 maturity date. The
note was extended to March 30, 1997 upon payment of all accrued interest.
In December 1994, the Trust received payment in full of the wraparound mortgage
note secured by a retirement center. In addition, the note agreement required
that the debtor make an additional profit participation payment. In settlement
of the profit participation, the borrower assigned a $1.8 million first
mortgage secured by an office building in Ft. Lauderdale, Florida, to the Trust
for which the Trust paid $283,000 in cash. The Trust discounted the note to
yield 12.0% per annum. The Trust recognized a $1.1 million gain on the
settlement of the profit participation, which is included in "Gain on sale of
real estate" in the Trust's 1994 Statement of Operations.
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C> <C>
Balance January 1, ....................... $ 6,305 $ 9,223 $ 8,946
Provision for losses ..................... -- 541 --
Amounts reclassified from
investment in partnerships ............ -- -- 1,109
Write down of properties ................. (4,648) (700) --
Amounts charged off ...................... (176) (2,759) (832)
------- ------- -------
Balance December 31, ..................... $ 1,481 $ 6,305 $ 9,223
======= ======= =======
</TABLE>
In addition to the above, the provision for losses in the accompanying
Consolidated Statements of Operations consists of a $884,000 negative provision
for losses from forgiveness of accrued interest on the Genesee Towers Office
Building note payable upon the transfer of the building
51
<PAGE> 52
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES (Continued)
to the lender in 1996 and a $1.2 million write down of the carrying
value of the Genesee Towers Office Building to the amount of the
nonrecourse mortgage and a $200,000 loss on the sale of a foreclosed
property held for sale in 1994. See NOTE 4. "REAL ESTATE AND
DEPRECIATION" and NOTE 7. "NOTES AND INTEREST PAYABLE."
NOTE 4. REAL ESTATE AND DEPRECIATION
In February 1996, the Trust completed the sale of the Rivertree Apartments in
Hurst, Texas for $1.8 million, a property under contract for sale at December
31, 1995. The Trust received net cash of $959,000 after the payment of various
closing costs associated with the sale. In conjunction with the sale, the Trust
provided $750,000 of purchase money financing which was paid in full in August
1996. The Trust recognized a gain of $378,000 on the sale. In September 1996,
the Trust received an insurance reimbursement for hail damage that had occurred
in 1995 and recognized an extraordinary gain of $149,000.
In March 1996, the Trust purchased the Hampton Court Office Building, a 104,001
square foot office building in Dallas, Texas, for $7.7 million. The Trust paid
$1.4 million in cash and obtained new mortgage financing of $6.3 million.
In April 1996, the Trust purchased the Amoco Building, a 378,244 square foot
office building in New Orleans, Louisiana, for $5.9 million in cash.
Also in April 1996, the Trust purchased the Central Storage Warehouse, a
216,035 square foot industrial warehouse in Dallas, Texas, for $2.2 million in
cash.
In May 1996, the Trust sold the Sunset Towers Apartments in San Francisco,
California, for $24.1 million in cash. The Trust received net cash of $9.7
million after the payoff of $14.0 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Trust recognized
a gain of $5.4 million on the sale.
In June 1996, the Trust purchased the Grove Park Apartments, a 188 unit
apartment complex in Plano, Texas, for $4.4 million. The Trust paid $1.2
million in cash and assumed the existing mortgage of $3.2 million.
Also in June 1996, the Trust sold the Crystal Court Apartments, a foreclosed
property held for sale, in Detroit, Michigan, for $700,000 in cash. The Trust
recognized no loss on the sale beyond the amounts previously provided.
In July 1996, the Trust purchased the Promenade Shopping Center, a 133,558
square foot shopping center in Highlands Ranch, Colorado, for $8.1 million. The
Trust paid $1.8 million in cash and obtained new mortgage financing for the
remaining $6.3 million of the purchase price.
52
<PAGE> 53
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
Also in July 1996, the Trust purchased the Park at Colonnade Apartments, a 211
unit apartment complex in San Antonio, Texas, for $4.2 million. The Trust paid
$700,000 in cash and obtained new mortgage financing for the remaining $3.5
million of the purchase price.
Also in July 1996, the Trust purchased the 3400 Carlisle Building, a 74,000
square foot office building in Dallas, Texas, for $5.3 million. The Trust paid
$800,000 in cash and obtained new mortgage financing for the remaining $4.5
million of the purchase price.
In August 1996, the Trust sold the Southgate Square Apartments in Round Rock,
Texas, for $6.1 million in cash. The Trust received net cash of $3.0 million
after the payoff of $2.9 million in existing mortgage debt and the payment of
various closing costs associated with the sale. The Trust recognized a gain of
$3.6 million on the sale.
In September 1996, the Trust purchased the Shady Trail Warehouse, a 42,900
square foot industrial warehouse in Dallas, Texas, for $681,000. The Trust paid
$131,000 in cash and obtained new mortgage financing for the remaining $550,000
of the purchase price.
Also in September 1996, the Trust sold the Ravenswood Apartments in
Stratford, New Jersey, for $1.2 million in cash. The Trust recognized
no gain or loss on the sale.
In October 1996, the Trust purchased 236 acres of undeveloped land on State
Highway 121 in Collin County, Texas, for $3.9 million in cash.
Also in October 1996, the Trust sold .60 acres of the 6 acre parcel of
Northwest Crossing land in Houston, Texas, for $290,000 in cash. The Trust
recorded the sale under the cost recovery method and therefore recognized no
gain or loss on the sale.
In November 1996, the Trust purchased the Glenwood Apartments in Addison,
Texas, for $4.2 million. The Trust paid $1.3 million in cash and assumed the
existing mortgage of $2.9 million.
In December 1996, the Trust purchased the Oak Run Apartments, a 160 unit
apartment complex in Pasadena, Texas, for $3.8 million. The Trust paid $1.2
million in cash and obtained new mortgage financing for the remaining $2.6
million of the purchase price.
Also in December 1996, the Trust purchased the Northpoint Central Office
Building, a 176,043 square foot office building in Houston, Texas, for $8.5
million. The Trust paid $2.7 million in cash with the seller financing the
remaining $5.8 million of the purchase price.
Also in December 1996, the Trust purchased the 2626 Cole Office Building, a
199,632 square foot office building in Dallas, Texas, for $8.7 million. The
Trust paid $2.2 million in cash and obtained new mortgage financing for the
remaining $6.5 million of the purchase price.
53
<PAGE> 54
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In 1995, the Trust purchased the following four apartment complexes: the
Willo-Wick Gardens Apartments, a 162 unit apartment complex in Pensacola,
Florida; the McCallum Glen Apartments, a 275 unit apartment complex in Dallas,
Texas; the Willow Wick Apartments, a 104 unit apartment complex in North
Augusta, South Carolina; and the Heritage on the River Apartments, a 301 unit
apartment complex in Jacksonville, Florida; and three commercial properties:
the Sullyfield Commerce Center, a 243,813 square foot industrial warehouse in
Chantilly, Virginia; the Kelly Warehouses, six industrial warehouses with a
total of 330,334 square feet in Dallas, Texas; and the Brookfield Corporate
Center, a 63,504 square foot industrial warehouse in Chantilly, Virginia. The
Trust paid $8.0 million in cash and either obtained new mortgage financing or
assumed existing mortgage debt for the remainder of the purchase prices.
NOTE 5. INVESTMENT IN MARKETABLE EQUITY SECURITIES
The Trust's investments in marketable equity securities consist of the
following:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
American Realty Trust, Inc. ("ART") ............ $5,318 $3,017
National Income Realty Trust ("NIRT") .......... -- 941
Transcontinental Realty Investors, Inc.("TCI") . 874 795
------ ------
$6,192 $4,753
====== ======
</TABLE>
The Trust's marketable equity securities are considered available-for-sale and
are carried at fair value (period end market value). The Trustees of the Trust
are also directors of TCI and the executive officers of the Trust are also
executive officers of ART and TCI. The Trust's advisor serves as advisor to ART
and TCI and prior to March 31, 1994 to NIRT.
In December 1996, the Trust sold its NIRT shares to NIRT for $1.1 million in
cash. The Trust received net cash of $550,000 after the payoff of margin debt
secured by the NIRT shares. The Trust recognized a gain of $725,000 on the
sale.
The Trust has margin arrangements with brokerage firms which provide for
borrowings of up to 50% of the market value of equity securities. The
borrowings under such margin arrangement are secured by equity securities of
ART and TCI and bear interest at an average of 8.19% per annum. Margin
borrowings were $597,000 at December 31, 1996 and $411,000 at December 31, 1995
and are included in other liabilities in the accompanying Consolidated Balance
Sheets.
54
<PAGE> 55
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investments in equity method partnerships consists of the
following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Sacramento Nine ("SAC 9") ........... $ 118 $ (48)
Indcon, L.P. ("Indcon") ............. 2,175 13,018
-------- --------
$ 2,293 $ 12,970
======== ========
</TABLE>
The Trust, in partnership with NIRT, owns SAC 9, which in turn owns two office
buildings in the vicinity of Sacramento, California. The Trust has a 30%
interest in the partnership's earnings, losses and distributions.
In August 1995, SAC 9 obtained mortgage financing secured by a previously
unencumbered office building in the amount of $3.5 million. SAC 9 received net
cash of $3.4 million after the payment of various closing costs associated with
the financing, of which the Trust's equity share was $1.0 million.
The Trust and NIRT are also partners in Income Special Associates ("ISA"), a
joint venture partnership in which the Trust has a 60% interest in the
partnership's earnings, losses and distributions. ISA in turn owns a 100%
interest in Indcon, which at December 31, 1996, owned five industrial
warehouses. The Indcon partnership agreement requires the consent of both the
Trust and NIRT for any material changes in the operations of the partnership's
properties, including sales, refinancings and changes in property management.
The Trust, as a noncontrolling partner, accounts for its investment in Indcon
using the equity method.
In February and March 1996, Indcon sold 25 of its industrial warehouses for a
total of $36.2 million in cash. Indcon received net cash of $14.2 million, of
which the Trust's equity share was $8.5 million, after the payoff of existing
mortgage debt with a principal balance of $23.5 million. Indcon recognized a
gain of $617,000 on the sale, of which the Trust's equity share was $370,000.
In March 1996, Indcon reached a settlement with an insurance company on the
fire loss of one of its industrial warehouses. Indcon received a total of $2.2
million in cash. Indcon does not intend to rebuild the destroyed warehouse and
accordingly has recognized an extraordinary gain of $1.1 million, of which the
Trust's equity share was $663,000.
In April 1996, Indcon sold two additional industrial warehouses for $1.8
million in cash, of which the Trust's equity share was $1.1 million. Indcon
recognized a loss of $522,000 on the sale, of which the Trust's equity share
was $313,000.
55
<PAGE> 56
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
Set forth below are summarized financial data for the partnerships the Trust
accounts for using the equity method:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Real estate, net of accumulated depreciation
($4,636 in 1996 and $13,736 in 1995) ........ $ 7,878 $ 44,712
Other assets ................................. 877 5,529
Notes payable ................................ (4,548) (28,391)
Other liabilities ............................ (176) (390)
-------- --------
Partners' capital ............................ $ 4,031 $ 21,460
======== ========
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Rents ........................................ $ 2,412 $ 7,766 $ 7,322
Depreciation ................................. (505) (2,080) (2,271)
Property operations .......................... (848) (2,186) (2,772)
Interest ..................................... (958) (3,506) (2,747)
------- ------- -------
Income (loss) before gain
on sale of real estate
and extraordinary gain .................... 101 (6) (468)
Gain on sale of real estate .................. 95 -- 962
Extraordinary gain ........................... 1,105 -- --
------- ------- -------
Net income (loss) ............................ $ 1,301 $ (6) $ 494
======= ======= =======
</TABLE>
NOTE 7. NOTES AND INTEREST PAYABLE
Notes and interest payable consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Notes payable........ $ 158,222 $ 159,726 $ 126,445 $ 134,262
========== ==========
Interest payable..... 828 1,328
---------- ----------
$ 160,554 $ 135,590
========== ==========
</TABLE>
Scheduled principal payments on notes payable are due as follows:
<TABLE>
<S> <C>
1997....................................................... $ 18,235
1998....................................................... 20,610
1999....................................................... 15,021
2000....................................................... 8,894
2001....................................................... 21,102
Thereafter................................................. 75,864
------------
$ 159,726
============
</TABLE>
Notes payable at December 31, 1996 bear interest at rates ranging from 3.25% to
10.5% and mature between 1997 and 2024. These notes payable are generally
nonrecourse and are collateralized by deeds of trust on real estate with a
carrying value of $201.8 million.
56
<PAGE> 57
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
In February 1995, after determining that further investment in Genesee Towers,
an office building in Flint, Michigan, could not be justified without a
substantial modification of the mortgage debt, the Trust ceased making debt
service payments on the $8.8 million nonrecourse mortgage secured by the
property. Accordingly, as of December 31, 1994, the Trust wrote down the
carrying value of the property by $1.2 million, which is included in the 1994
provision for losses, to the amount of the nonrecourse mortgage which
approximated the fair value of the property. In February 1996, the Trust and
the lender entered into a forbearance agreement that provided, among other
things, that until August 20, 1996, the Trust make monthly payments of the
greater of regular scheduled principal and interest or cash flow from the
property. The deed to the property was placed in escrow during the term of the
forbearance agreement. The Trust transferred the property to the lender in
September 1996. During the pendency of the foreclosure negotiations, the Trust
continued to accrue and expense its interest obligations on such note. The
Trust recorded a negative provision for loss of $884,000 with the elimination
of its obligation for such accrued interest on the transfer of the property to
the lender.
In 1996, the Trust purchased four apartment complexes, four office buildings,
one shopping center and one industrial warehouse for a total of $55.6 million.
In connection with these acquisitions, the Trust either assumed existing
mortgage debt or obtained new mortgage financing totaling $42.2 million. The
new mortgages bear interest at rates ranging from 8.0% to 10.0% per annum,
require monthly payments of principal and interest, currently totaling $315,849
and mature from June 1997 to November 2004.
In April 1996, the Trust refinanced the mortgage debt secured by the Edgewood
Apartments in Lansing, Illinois in the amount of $8.1 million. The Trust
received net cash of $1.3 million after the payoff of $6.7 million in existing
mortgage debt, including a $60,000 prepayment penalty. The remainder of the
refinancing proceeds were used to pay various closing costs associated with the
refinancing. The new mortgage bears interest at 8.65% per annum, requires
monthly payments of principal and interest of $66,000 and matures in May 2006.
Also in April 1996, the Trust refinanced the mortgage debt secured by the In
the Pines Apartments in Gainesville, Florida in the amount of $6.0 million. The
Trust received net cash of $415,000 after the payoff of $5.3 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
pay various closing costs associated with the refinancing. The new mortgage
bears interest at 8.65% per annum, requires monthly payments of principal and
interest of $49,000 and matures in May 2006.
Also in April 1996, the Trust refinanced the mortgage debt secured by the Quail
Oaks Apartments in Balch Springs, Texas in the amount of $1.3 million. The
Trust received net cash of $413,000 after the payoff of
57
<PAGE> 58
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
$753,000 in existing mortgage debt. The remainder of the refinancing proceeds
were used to pay various closing costs associated with the refinancing. The new
mortgage bears interest at 8.875% per annum, requires monthly payments of
principal and interest of $10,798 and matures in May 2006.
In May 1996, the Trust obtained mortgage financing for the previously
unencumbered Applecreek Apartments in Dallas, Texas in the amount of $1.8
million. The Trust received net cash of $1.6 million after payment of various
closing costs associated with the financing. The mortgage bears interest at
8.875% per annum, requires monthly payments of principal and interest of
$15,076 and matures in June 2006.
In June 1996, the Trust refinanced the mortgage debt secured by the Fairways
Apartments in Longview, Texas in the amount of $2.0 million. The Trust received
net cash of $210,000 after the payoff of $1.7 million in existing mortgage
debt. The remainder of the refinancing proceeds were used to pay various
closing costs associated with the refinancing. The new mortgage bears interest
at 8.9375% per annum, requires monthly payments of principal and interest of
$16,003 and matures in July 2006.
In July 1996, the Trust refinanced the mortgage debt secured by the Woodbridge
Apartments in Denver, Colorado in the amount of $3.0 million. The Trust
received net cash of $2.0 million after the payoff of $903,000 in existing
mortgage debt. The remainder of the refinancing proceeds were used to pay
various closing costs associated with the refinancing. The new mortgage bears
interest at 9.125% per annum, requires monthly payments of principal and
interest of $25,433 and matures in August 2006.
Also in July 1996, the Trust obtained mortgage financing for the previously
unencumbered Forest Ridge Apartments in Denton, Texas in the amount of $1.2
million. The Trust received net cash of $1.1 million after payment of various
closing costs associated with the financing. The mortgage bears interest at
8.875% per annum, requires monthly payments of principal and interest of
$10,175 and matures in August 2006.
In August 1996, the Trust obtained mortgage financing for the previously
unencumbered Central Storage Warehouse in Dallas, Texas in the amount of $1.4
million. The Trust received net cash of $1.4 million after the payment of
various closing costs associated with the financing. The mortgage bears
interest at 8.5% per annum through July 30, 1999 and at a variable rate
thereafter, requires monthly payments of principal and interest of $13,786
through July 30, 1999 adjusted thereafter based on the then effective interest
rate and matures in July 2011.
Also in August 1996, the Trust refinanced the mortgage debt secured by the
McCallum Glen Apartments in Dallas, Texas in the amount of $5.2 million. The
Trust received net cash of $761,000 after the payoff of
58
<PAGE> 59
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
$4.2 million in existing mortgage debt and the payment of various closing costs
associated with the financing. The new mortgage bears interest at 8.5% per
annum, requires monthly payments of principal and interest of $40,176 and
matures in September 2006.
In November 1996, the Trust refinanced the mortgage debt secured by the
Somerset Apartments in Texas City, Texas in the amount of $3.2 million. The
Trust received net cash of $452,000 after the payoff of $2.6 million in
existing mortgage debt and the payment of various closing costs associated with
the refinancing. The new mortgage bears interest at 8.3% per annum, requires
monthly payments of principal and interest $25,654 and matures in December
2006.
In 1995, the Trust purchased four apartment complexes and three industrial
warehouses for a total of $38.9 million. In connection with the acquisitions,
the Trust either assumed existing mortgage debt or obtained new mortgage
financing totaling $31.0 million. The mortgages bear interest at rates ranging
from 6.0% to 9.915% per annum, require monthly payments of principal and
interest, totaling $243,000, and mature from May 1997 to January 2013.
In May and December 1995, the Trust refinanced the mortgage debt secured by the
Sunset Lake Apartments in Waukegan, Illinois in the amount of $8.0 million. The
Trust received net cash of $5.3 million after the payoff of $1.9 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
fund repair escrows and to pay various closing costs associated with the
refinancings. The new mortgages bear interest at 7.625% per annum, require
monthly payments of principal and interest of $60,000 and mature in January
2006.
Also in 1995, the Trust obtained mortgage financing secured by the previously
unencumbered Quail Oaks Apartments in Balch Springs, Texas in the amount of
$750,000. The Trust received net cash of $734,000 after the payment of various
closing costs associated with the financing. As described above, this property
was refinanced in April 1996.
NOTE 8. DISTRIBUTIONS
The Trust has paid regular quarterly distributions to its shareholders since
the first quarter of 1993. In 1996, the Trust paid regular and special
distributions of $.89 per share of beneficial interest totaling $3.8 million.
In 1995 and 1994, the Trust paid distributions of $.40 per share of beneficial
interest totaling $1.8 million in each year.
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1996 represented capital gains and that 100% of the
distributions paid in 1995 and 1994 represented a return of capital.
59
<PAGE> 60
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as
advisor to the Trust since March 28, 1989. BCM is a company owned by a
trust for the benefit of the children of Gene E. Phillips. Mr. Phillips
served as a Trustee of the Trust until December 31, 1992, as director of
BCM until December 22, 1989 and as Chief Executive Officer of BCM until
September 1, 1992. Mr. Phillips serves as a representative of his
children's trust which owns BCM and, in such capacity, has substantial
contact with the management of BCM and input with respect to its
performance of advisory services to the Trust.
At the Trust's annual meeting of shareholders held on 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 Trust's Advisory Agreement with BCM require the approval of the
Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales and acquisitions, lending, foreclosure and
borrowing activity, and other investments. The Advisor is required to report
quarterly to the Trust's Board of Trustees on the Trust's performance against
the business plan. In addition, all transactions or investments by the Trust
shall require prior approval by the Trust's Board of Trustees unless they are
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to the Advisor by the Trust's Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average of the gross
asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee. BCM or an affiliate of BCM is to receive an acquisition commission
for supervising the acquisition, purchase or long-term lease of real estate for
the Trust. BCM or an affiliate of BCM is to receive a mortgage or loan
acquisition fee with respect to the acquisition or purchase of any existing
mortgage loan by the Trust. BCM or an affiliate of BCM is also to receive a
mortgage brokerage and equity refinancing fee for obtaining loans to the Trust
or refinancing on Trust properties and BCM is to receive reimbursement of
certain expenses incurred by it in the performance of advisory services to the
Trust.
60
<PAGE> 61
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust),
all or a portion of the annual advisory fee must be refunded by the Advisor to
the Trust if the Operating Expenses of the Trust (as defined in the Trust's
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust. The effect of this limitation was to require that BCM refund $589,000
and $250,000 of the annual advisory fee for 1996 and 1995, respectively. The
operating expenses of the Trust did not exceed such limitation in 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 services on terms to
be agreed upon from time to time. As discussed in NOTE 10. "PROPERTY
MANAGEMENT", the Trust has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."),
an affiliate of BCM, to provide property management for the Trust's properties
and, as discussed in NOTE 11. "REAL ESTATE BROKERAGE" the Trust has engaged
Carmel Realty, Inc. ("Carmel Realty"), also an affiliate of BCM, on a
non-exclusive basis, to provide brokerage services for the Trust.
NOTE 10. PROPERTY MANAGEMENT
Carmel, Ltd. provides property management services to the Trust for a
fee of 5% or less of the monthly gross rents collected on the properties
under its management. Carmel, Ltd. subcontracts with other entities for
the property-level management services to the Trust at various rates.
The general partner of Carmel, Ltd. is BCM. The limited partners of
Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is
the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the
benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of seventeen of the Trust's
commercial properties and the industrial warehouse facilities owned by
one of the real estate partnerships in which the Trust and NIRT are
partners to Carmel Realty, which is owned by SWI. Carmel Realty is
entitled to receive property and construction management fees and
leasing commissions in accordance with the terms of its property-level
management agreement with Carmel, Ltd.
NOTE 11. REAL ESTATE BROKERAGE
Carmel Realty provides brokerage services to the Trust on a non-exclusive
basis. Carmel Realty is entitled to receive a commission for property
acquisitions and sales, in accordance with a sliding scale of total fees to be
paid by the Trust.
61
<PAGE> 62
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM and its affiliates:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Fees
Advisory ..................... $1,091 $1,264 $1,326
Incentive sales fee .......... 342 -- --
Net income fee ............... 707 -- --
Real estate brokerage ........ 4,217 1,581 1,480
Mortgage brokerage and equity
refinancing ................ 333 142 100
Property and construction
management fees and
leasing commissions* ....... 1,048 806 570
------ ------ ------
$7,738 $3,793 $3,476
====== ====== ======
Cost reimbursements ............. $ 825 $ 506 $ 524
====== ====== ======
</TABLE>
* Net of property management fees paid to subcontractors, other than
Carmel Realty.
NOTE 13. RENTS UNDER OPERATING LEASES
The Trust's operations include the leasing of commercial properties (office
buildings, industrial warehouses and shopping centers). The leases thereon
expire at various dates through 2006. The following is a schedule of minimum
future rents on non-cancelable operating leases as of December 31, 1996:
<TABLE>
<S> <C>
1997............................................ $14,626
1998............................................ 11,934
1999............................................ 9,670
2000............................................ 5,795
2001............................................ 3,484
Thereafter...................................... 6,480
-------
$51,989
=======
</TABLE>
NOTE 14. INCOME TAXES
For the years 1996, 1995 and 1994, the Trust has elected and qualified
to be treated as a Real Estate Investment Trust ("REIT"), as defined in
Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), and as such, will not be taxed for federal income
tax purposes on that portion of its taxable income which is distributed
to shareholders, provided that at least 95% of its REIT taxable income,
plus 95% of its taxable income from foreclosure property as defined in
Section 857 of the Code, is distributed. See NOTE 8. "DISTRIBUTIONS."
62
<PAGE> 63
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. INCOME TAXES (Continued)
The Trust had a loss for federal income tax purposes in 1996 (after applying
net operating loss carryforwards), 1995 and 1994; therefore, the Trust recorded
no provision for income taxes.
The Trust's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, principally due to
the accounting for gains and losses on property sales, the difference in the
allowance for estimated losses, depreciation on owned properties and
investments in joint venture partnerships. At December 31, 1996, the Trust's
tax basis in its net assets exceeded its basis for financial statement purposes
by $40.9 million. As a result, aggregate future income for income tax purposes
will be less than such amount for financial statement purposes, and the Trust
would be able to maintain its REIT status without distributing 95% of its
financial statement income. Additionally, at December 31, 1996, the Trust had a
tax net operating loss carryforwards of $45.5 million expiring through 2010.
As a result of the Trust's election to be treated as a REIT for income tax
purposes and of its intention to distribute its taxable income, if any, in
future years, no deferred tax asset, liability or valuation allowance was
recorded.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Olive Litigation. In February 1990, the Trust, together with Income
Opportunity Realty Investors, Inc. ("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
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, the President and Trustee of the Trust until February 24,
1994, President of BCM until May 1, 1993 and director of BCM until December 22,
1989, agreed to pay a total of $1.2 million to the Trust, IORI, NIRT and TCI,
of which the Trust's share was $750,000.
63
<PAGE> 64
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
Under the Modification, the Trust, IORI, NIRT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, IORI, NIRT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all then current members of
the Trust's Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Trust's Board of Trustees appointed pursuant to the
terms of the Modification that stand for reelection during the three calendar
years following the effective date of the Modification.
Pursuant to the terms of the Modification, certain related party transactions
which the Trust may enter into prior to April 28, 1999, require the unanimous
approval of the Trust's Board of Trustees. In addition, such related party
transactions are to be discouraged and may only be entered into in exceptional
circumstances and after a determination by the Trust's Board of Trustees that
the transaction is in the best interests of the Trust and that no other
opportunity exists that is as good as the opportunity presented by such
transaction.
For purposes of the Modification requirements, the term "related party
transaction" means and includes (i) any transaction between or among the Trust
or IORI, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any
transaction between or among the Trust, its affiliates or subsidiaries and the
Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any
transaction between or among the Trust or any of its affiliates or subsidiaries
and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of
their affiliates has an ongoing or contemplated business or financial
transaction or relationship of any kind, whether direct or indirect, or has had
such a transaction or relationship in the preceding one year.
The Modification requirements for related party transactions do not apply to
direct contractual agreements for services between the Trust and the Advisor or
one of its affiliates, (including the Advisory Agreement, the Brokerage
Agreement and the property management contracts). These agreements require the
prior approval by two-thirds of the Trustees of the Trust, and if required,
approval by a majority of the 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.
64
<PAGE> 65
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
The Modification also terminated a number of the provisions of the settlement,
including the requirement that the Trust, IORI, NIRT and TCI maintain a Related
Party Transaction Committee and a Litigation Committee of their respective
Boards. The court retained jurisdiction to enforce the Modification, and during
August and September 1996, the court held evidentiary hearings to assess
compliance with the terms of the Modification by the 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
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 Trust's Board of Trustees. As of March 7, 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, IORI, TCI and their shareholders released the defendants from any
claims relating to the 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.
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.
Other litigation. The Trust is also involved in various lawsuits arising in the
ordinary course of business. The Trust's management is of the opinion that the
outcome of these lawsuits would have no material impact on the Trust's
financial condition, results of operations or liquidity.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
65
<PAGE> 66
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. QUARTERLY DATA
The following is a tabulation of the Trust's quarterly results of operations
for the years 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
1996 March 31 June 30 September 30 December 31
- ---- -------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues ........................ $ 10,958 $ 11,365 $ 11,703 $ 11,337
Expenses ........................ 11,005 12,045 11,739 13,010
-------- -------- ----------- -----------
(Loss) from operations .......... (47) (680) (36) (1,673)
Equity in income (loss)
of partnerships ............ 395 (219) 21 31
Gain on sale of real estate
and marketable equity
securities ................. 378 5,421 3,598 725
-------- -------- ----------- -----------
Income (loss) before extra-
ordinary gain .............. 726 4,522 3,583 (917)
Extraordinary gain .............. 697 (34) 149 --
-------- -------- ----------- -----------
Net income (loss) ............... $ 1,423 $ 4,488 $ 3,732 $ (917)
======== ======== =========== ===========
Earnings per share
Income (loss) before extra-
ordinary gain .............. $ .17 $ 1.07 $ .86 $ (.22)
Extraordinary gain .............. .16 -- .04 --
-------- -------- ----------- -----------
Net income (loss) ............... $ .33 $ 1.07 $ .90 $ (.22)
======== ======== =========== ===========
</TABLE>
The Trust purchased twelve income producing properties in 1996 consisting of
one office building in the first quarter, one office building, one apartment
complex and one industrial warehouse in the second quarter, one apartment
complex, one office building, one shopping center and one industrial warehouse
in the third quarter and two apartment complexes and two office buildings in
the fourth quarter.
In the first, second and third quarters, the Trust recognized gains on sales of
apartment complexes of $378,000, $5.4 million and $3.6 million, respectively.
In the fourth quarter, the Trust recognized a $725,000 gain on the sale of
marketable equity securities.
In the first quarter, the Trust recognized an extraordinary gain of $663,000,
its equity share of an insurance settlement from a fire loss on an industrial
warehouse owned by Indcon. In the third quarter, the Trust recognized an
extraordinary gain of $149,000 representing an insurance settlement on a
previously sold apartment complex.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
66
<PAGE> 67
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. QUARTERLY DATA (Continued)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
1995
- ----
<S> <C> <C> <C> <C>
Revenues .............. $ 8,668 $ 9,627 $ 9,836 $ 10,408
Expenses .............. 9,312 9,710 10,173 10,787
-------- -------- ----------- -----------
Net (loss) ............ $ (644) $ (83) $ (337) $ (379)
======== ======== =========== ===========
Earnings per share
Net (loss) ............ $ (.15) $ (.02) $ (.08) $ (.08)
======== ======== =========== ===========
</TABLE>
The Trust purchased seven properties in 1995 consisting of two industrial
warehouses in the first quarter, an apartment complex in each of the second and
third quarters, and two apartment complexes and an industrial warehouse in the
fourth quarter.
NOTE 17. SUBSEQUENT EVENTS
In January 1997, the Trust purchased the Lost Timbers Apartments, a 180 unit
apartment complex in Houston, Texas, for $3.5 million. The Trust paid $800,000
in cash and assumed the existing mortgage of $2.7 million. The mortgage bears
interest at a variable rate, currently 9.29% per annum, adjusted semi-annually,
requires monthly payments of principal and interest of $22,704, also adjusted
semi-annually and matures in June 1999.
In February 1997, the Trust purchased the Watters Road land, 103 acres of
undeveloped land on State Highway 121 in Collin County, Texas, for $1.7 million
in cash.
Also in February 1997, the Trust purchased the Jefferson Office Building, a
71,877 square foot office building in Washington, D.C., for $13.2 million. The
Trust paid $4.1 million in cash and obtained new mortgage financing of $9.1
million. The mortgage bears interest at 8.0% per annum, requires monthly
payments of principal and interest of $70,000 and matures in March 1999.
67
<PAGE> 68
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
--------------------- ------------- ----------------------------------
Buildings & Improvements Buildings &
Property/Location Encumbrances Land Improvements & Adjustments Land Improvements Total(1)
- ---------------------- ------------ ------- ------------ ------------- ---- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Properties Held for Investment
Apartments
4242 Cedar Springs.... $ 1,412 $ 372 $ 1,117 $ 26 $ 372 $ 1,143 $ 1,515
Dallas, TX
Apple Creek........... 1,805 167 946 230 167 1,176 1,343
Dallas, TX
Camelot............... 3,087 1,230 2,870 87 1,230 2,957 4,187
Largo, FL
Country Crossings..... 2,708 772 2,444 144 772 2,588 3,360
Tampa, FL
Edgewood.............. 8,045 598 6,872 1,479 598 8,351 8,949
Lansing, IL
El Chapparal.......... 2,650 279 2,821 458 279 3,279 3,558
San Antonio, TX
Fairways.............. 1,994 657 1,532 97 657 1,629 2,286
Longview, TX
Forest Ridge.......... 1,220 212 849 85 212 934 1,146
Denton, TX
Fountain Lake......... 2,436 861 2,585 - 861 2,585 3,446
Texas City, TX
Glenwood.............. 2,881 877 3,506 - 877 3,506 4,383
Addison, TX
Grove Park............ 3,205 942 3,767 - 942 3,767 4,709
Plano, TX
Heritage on the River. 6,501 2,070 6,211 152 2,070 6,363 8,433
Jacksonville, FL
In the Pines.......... 5,959 1,288 5,154 406 1,288 5,560 6,848
Gainesville, FL
McCallum Crossing..... 6,280 2,005 6,017 53 2,005 6,070 8,075
Dallas, TX
McCallum Glen......... 5,215 1,257 5,027 73 1,257 5,100 6,357
Dallas, TX
Oak Park IV........... - 224 674 27 224 701 925
Clute, TX
Oak Run............... 2,625 788 3,152 - 788 3,152 3,940
Pasadena, TX
Park at Colonnade..... 3,500 887 3,546 31 887 3,577 4,464
San Antonio, TX
Park Lane............. 1,205 175 978 99 175 1,077 1,252
Dallas, TX
Parkwood Knoll........ 5,024 1,659 4,975 - 1,659 4,975 6,634
San Bernardino, CA
Pierce Tower.......... 1,937 566 2,262 - 566 2,262 2,828
Denver, CO
Quail Oaks............ 1,292 90 2,160 141 90 2,301 2,391
Balch Springs, TX
Somerset.............. 3,240 936 2,811 77 936 2,888 3,824
Texas City, TX
<CAPTION> Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- -------------------- ------------ ------------ -------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held for Investment
Apartments
4242 Cedar Springs.... $ 129 1984 Jun-92 5-40 years
Dallas, TX
Apple Creek........... 263 1971 Dec-90 5-40 years
Dallas, TX
Camelot............... 297 1975 Aug-93 5-40 years
Largo, FL
Country Crossings..... 310 1973 Apr-93 5-40 years
Tampa, FL
Edgewood.............. 2,800 1972 Aug-87 5-40 years
Lansing, IL
El Chapparal.......... 1,050 1963 Jan-88 5-40 years
San Antonio, TX
Fairways.............. 207 1980 Mar-93 5-40 years
Longview, TX
Forest Ridge.......... 157 1975 Nov-91 5-40 years
Denton, TX
Fountain Lake......... 187 1975 Feb-94 40 years
Texas City, TX
Glenwood.............. 13 1975 Nov-96 40 years
Addison, TX
Grove Park............ 55 1979 Jun-96 40 years
Plano, TX
Heritage on the River. 174 1973 Dec-95 5-40 years
Jacksonville, FL
In the Pines.......... 362 1972 Dec-94 5-40 years
Gainesville, FL
McCallum Crossing..... 432 1985 Mar-94 5-40 years
Dallas, TX
McCallum Glen......... 184 1986 Jul-95 5-40 years
Dallas, TX
Oak Park IV........... 53 1981 Jun-94 5-40 years
Clute, TX
Oak Run............... - 1982 Dec-96 40 years
Pasadena, TX
Park at Colonnade..... 45 1975 Jul-96 5-40 years
San Antonio, TX
Park Lane............. 226 1972 Dec-90 5-40 years
Dallas, TX
Parkwood Knoll........ 301 1986 Aug-94 5-40 years
San Bernardino, CA
Pierce Tower.......... 132 1958 Sep-94 5-40 years
Denver, CO
Quail Oaks............ 700 1982 Feb-87 5-40 years
Balch Springs, TX
Somerset.............. 220 1985 Dec-93 5-40 years
Texas City, TX
</TABLE>
68
<PAGE> 69
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1996
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
--------------------- ------------- ----------------------------------
Buildings & Improvements Buildings &
Property/Location Encumbrances Land Improvements & Adjustments Land Improvements Total(1)
- ---------------------- ------------ ------- ------------ ------------- ---- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Properties Held for Investment - (Continued)
Stone Oak............. $ 3,189 $ 649 $ 2,598 $ 164 $ 649 $ 2,762 $ 3,411
San Antonio, TX
Sunset Lake........... 7,898 1,626 6,544 448 1,626 6,992 8,618
Waukegan, IL
Willow Creek.......... 1,816 608 1,832 31 608 1,863 2,471
El Paso, TX
Will-O-Wick........... 2,769 747 2,990 54 747 3,044 3,791
Pensacola, FL
Willow Wick........... 904 324 1,305 15 324 1,320 1,644
North Augusta, SC
Woodbridge............ 2,989 899 2,099 104 899 2,203 3,102
Westminster, CO
Industrial Warehouses
Brookfield Corporate
Center.............. 2,764 727 2,909 - 727 2,909 3,636
Chantilly, VA
Central Storage....... 1,385 464 1,856 129 464 1,985 2,449
Dallas, TX
Kelly Warehouses...... 4,986 1,136 4,856 304 1,136 5,160 6,296
Dallas, TX
McLeod Commerce Center 2,157 673 2,693 132 673 2,825 3,498
Orlando, FL
Northgate Distribution 3,027 876 3,505 305 876 3,810 4,686
Marietta, GA
Shady Trail........... 549 145 581 1 145 582 727
Dallas, TX
Sullyfield Commercial
Center.............. 8,800 2,299 9,196 31 2,299 9,227 11,526
Chantilly, VA
Office Buildings
2626 Cole.............. 6,540 1,819 7,276 - 1,819 7,276 9,095
Dallas, TX
3400 Carlisle.......... 4,500 1,122 4,487 - 1,122 4,487 5,609
Dallas, TX
Amoco.................. - 1,233 4,933 632 1,233 5,565 6,798
New Orleans, LA
Hampton Court.......... 6,300 1,610 6,439 35 1,610 6,474 8,084
Dallas, TX
NASA................... - 410 3,319 <1,162> 410 2,157 2,567
Houston, TX
Northpoint Central..... 5,750 1,773 7,092 - 1,773 7,092 8,865
Houston, TX
Tollhill West.......... 5,094 1,634 6,538 1,268 1,634 7,806 9,440
Dallas, TX
Windsor Plaza......... 373 1,429 4,441 <585> 1,429 3,856 5,285
Windcrest, TX
<CAPTION> Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- -------------------- ------------ ------------ -------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held for Investment - (Continued)
Stone Oak............. $ 575 1978 Mar-90 5-40 years
San Antonio, TX
Sunset Lake........... 427 1969 Sep-94 5-40 years
Waukegan, IL
Willow Creek.......... 134 1972 May-94 5-40 years
El Paso, TX
Will-O-Wick........... 128 1974 May-95 5-40 years
Pensacola, FL
Willow Wick........... 40 1971 Nov-95 5-40 years
North Augusta, SC
Woodbridge............ 140 1968 Sep-94 5-40 years
Westminster, CO
Industrial Warehouses
Brookfield Corporate
Center.............. 79 1990 Dec-95 40 years
Chantilly, VA
Central Storage....... 37 1966 Apr-96 5-40 years
Dallas, TX
Kelly Warehouses...... 319 1966-1973 Mar-95 5-40 years
Dallas, TX
McLeod Commerce Center 186 1985 Sep-94 5-40 years
Orlando, FL
Northgate Distribution 378 1987 Nov-93 5-40 years
Marietta, GA
Shady Trail........... 5 1970 Sep-96 5-40 years
Dallas, TX
Sullyfield Commercial
Center.............. 431 1986 Feb-95 5-40 years
Chantilly, VA
Office Buildings
2626 Cole.............. - 1986 Dec-96 40 years
Dallas, TX
3400 Carlisle.......... 56 1985 Jul-96 40 years
Dallas, TX
Amoco.................. 107 1977 Apr-96 5-40 years
New Orleans, LA
Hampton Court.......... 136 1987 Mar-96 5-40 years
Dallas, TX
NASA................... 1,129 1979 Oct-85 5-40 years
Houston, TX
Northpoint Central..... - 1983 Dec-96 40 years
Houston, TX
Tollhill West.......... 1,286 1984 Jun-91 5-40 years
Dallas, TX
Windsor Plaza......... 1,744 1984 Nov-86 5-40 years
Windcrest, TX
</TABLE>
69
<PAGE> 70
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1996
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent
to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
--------------------- ------------- ----------------------------------
Buildings & Improvements Buildings &
Property/Location Encumbrances Land Improvements & Adjustments Land Improvements Total(1)
- ---------------------- ------------ ------- ------------ ------------- ---- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Properties Held for Investment - (Continued)
Shopping Centers
Builders Square....... $ 1,016 $ 1,160 $ 1,740 $ - $ 1,160 $ 1,740 $ 2,900
St. Paul, MN
Promenade............. 6,257 1,749 6,995 20 1,749 7,015 8,764
Highlands Ranch, CO
Rio Pinar............. 5,999 3,190 5,205 310 3,190 5,515 8,705
Orlando, FL
Land
State Highway 121..... - 4,354 - - 4,354 - 4,354
Collin County, TX -------- --------- ---------- ------ ------- -------- ---------
159,283 51,568 173,705 5,901 51,568 179,606 231,174
-------- --------- ---------- ------ ------- -------- ---------
Properties Held for Sale
Apartment
Shadowridge........... - 85 338 138 85 476 561
Rock Springs, WY
Industrial Warehouse
Ogden................. - 52 1,568 208 52 1,776 1,828
Ogden, UT
Office Building
Pinemont ............. 440 175 526 5 175 531 706
Houston, TX
Land
Del Ray Forum......... - 1,202 - (402)(2) 800 - 800
Miami, FL
Northwest Crossing.... - 1,238 - (271)(3) 967 - 967
Houston, TX
Round Mt.............. - 5,740 - (4,140)(2) 1,600 - 1,600
Austin, TX
-------- --------- ---------- ------ ------- -------- ---------
440 8,492 2,432 (4,462) 3,679 2,783 6,462
-------- --------- ---------- ------ ------- -------- ---------
$159,723 $ 60,060 $ 176,137 $1,439 $55,247 $ 182,389 $237,636
======== ========= ========== ====== ======= ========= ========
<CAPTION> Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Property/Location Depreciation Construction Acquired is Computed
- -------------------- ------------ ------------ -------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held for Investment - (Continued)
Shopping Centers
Builders Square....... $ 236 1972 Aug-91 5-40 years
St. Paul, MN
Promenade............. 88 1985 Jul-96 5-40 years
Highlands Ranch, CO
Rio Pinar............. 756 1984 Dec-91 5-40 years
Orlando, FL
Land
State Highway 121..... - - Oct-96 -
Collin County, TX --------
16,714
--------
Properties Held for Sale
Apartment
Shadowridge........... 89 1973 Jan-91 5-40 years
Rock Springs, WY
Industrial Warehouse
Ogden................. 608 1979 Jan-86 5-40 years
Ogden, UT
Office Building
Pinemont ............. 27 1979 Dec-93 5-40 years
Houston, TX
Land
Del Ray Forum......... - - May-86 -
Miami, FL
Northwest Crossing.... - - Dec-93 -
Houston, TX
Round Mt.............. - - Dec-86 -
Austin, TX --------
724
--------
$ 17,438
========
</TABLE>
(1) The aggregate cost for federal income tax purposes is $283.3 million.
(2) The carrying value of this property was reduced to the Trust's
estimate of fair value minus estimated costs of sale.
(3) Sale of a portion of land.
70
<PAGE> 71
SCHEDULE III
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1, ....................... $ 205,269 $ 162,823 $ 121,861
Additions
Acquisitions and improvements ......... 74,414 42,306 35,107
Foreclosures .......................... -- 891 11,242
Deductions
Sales ................................. (27,868) (51) (3,558)
Permanent write-downs ................. (4,648) (700) (1,229)
Refund of excess acquisition
fees ............................... -- -- (600)
Foreclosure ........................... (9,531) -- --
--------- --------- ---------
Balance at December 31, ..................... $ 237,636 $ 205,269 $ 162,823
========= ========= =========
Reconciliation of Accumulated
Depreciation
Balance at January 1, ....................... $ 17,735 $ 13,459 $ 10,378
Additions
Depreciation .......................... 4,819 4,279 3,214
Deductions
Sales ................................. (4,063) (3) (133)
Foreclosure ........................... (1,053) -- --
--------- --------- ---------
Balance at December 31, ..................... $ 17,438 $ 17,735 $ 13,459
========= ========= =========
</TABLE>
71
<PAGE> 72
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1996
<TABLE>
<CAPTION>
Interest Maturity
Description Rate Date Periodic Payment Terms
- ------------------- -------- -------- ---------------------------------------------
FIRST MORTGAGE LOANS
<S> <C> <C> <C>
Buena Vista Office 12.00% 7/93 Monthly principal and interest payments
- ------------------ of $8,870.
secured by office
building in
Titusville, FL.
Country Elms 8.00% 5/02 Monthly interest only payments through
- ------------ June 1993. Monthly principal and interest
secured by mobile home payments of $3,154 beginning July 1993.
park in Galesburg, IL.
Cypress Creek 8.00% 2/09 Monthly payments of principal and interest.
- ------------- to
secured by office 9.00%
building in Ft.
Lauderdale, FL.
English Hills 8.50% 6/99 Monthly payments of interest only through June
- ------------- to 1995. Monthly payments of principal and
secured by apartment 9.00% interest thereafter. $25,000 principal pay-
complex in Tampa, FL. ment due June 1997.
Forest Ridge 7.50% 5/01 Monthly payments of principal and interest.
- ------------ to
secured by shopping 8.30%
center in Denton, TX.
Golden Pond Apartments 7.50% 7/97 Monthly interest only payments.
- ---------------------- to
secured by apartment 9.50%
complex in Phoenix, AZ.
Henderson County Ranch 12.50% 11/95 Interest and $200,000 principal payment due
- ---------------------- November 1,1995.
secured by ranch in
Henderson County, TX.
Residential - various 10.00% 02/05 Monthly fixed principal and
- --------------------- to to interest payments.
7 mortgages secured 11.50% 04/18
by 7 homes in AZ, MA,
CO and HI.
JUNIOR MORTGAGE LOAN
Signature Athletic Club 12.00% 10/98 Monthly payments of interest only to the
- ----------------------- extent of available cash flow. Unpaid
secured by a building interest compounded into principal as of
housing a health club January 1 of each year.
in Dallas, TX.
<CAPTION>
Carrying Amounts Principal Amount of
of Mortgage Loans Subject to
Prior Face Amount Net of Discount Delinquent Principal
Description Liens of Mortgage (1) or Interest
- ------------------- ------- ----------- ---------------- --------------------
(dollars in thousands)
FIRST MORTGAGE LOANS
<S> <C> <C> <C> <C>
Buena Vista Office $ - $ 700 $ 700 (2) $ 700
- ------------------
secured by office
building in
Titusville, FL.
Country Elms - 380 260 -
- ------------
secured by mobile home
park in Galesburg, IL.
Cypress Creek - 1,800 1,399 -
- -------------
secured by office
building in Ft.
Lauderdale, FL.
English Hills - 590 582 -
- -------------
secured by apartment
complex in Tampa, FL.
Forest Ridge - 365 333 -
- ------------
secured by shopping
center in Denton, TX.
Golden Pond Apartments - 990 991 -
- ----------------------
secured by apartment
complex in Phoenix, AZ.
Henderson County Ranch - 1,500 1,400 (2) 1,400
- ----------------------
secured by ranch in
Henderson County, TX.
Residential - various - 749 639 -
- ---------------------
7 mortgages secured
by 7 homes in AZ, MA,
CO and HI.
JUNIOR MORTGAGE LOAN
Signature Athletic Club - 1,500 1,500 -
- -----------------------
secured by a building
housing a health club
in Dallas, TX.
</TABLE>
72
<PAGE> 73
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1996
<TABLE>
<CAPTION>
Interest Maturity
Description Rate Date Periodic Payment Terms
- ------------------- -------- -------- ---------------------------------------------
OTHER
<S> <C> <C> <C>
Conine 13.00% 3/97 Principal and interest due at maturity.
- ------
secured by contract to
purchase land in
Dallas, TX
Interest receivable
Deferred gain
Allowance for estimated losses
<CAPTION>
Carrying Amounts Principal Amount of
of Mortgage Loans Subject to
Prior Face Amount Net of Discount Delinquent Principal
Description Liens of Mortgage (1) or Interest
- ------------------- ------- ----------- ---------------- --------------------
(dollars in thousands)
OTHER
<S> <C> <C> <C> <C>
Conine $ - $ 500 $ 500 $ -
- ------ -------- --------- --------- --------
secured by contract to
purchase land in
Dallas, TX
$ - $ 9,074 8,304 $ 2,100
======== ========== =========
Interest receivable 318
Deferred gain (67)
---------
8,555
Allowance for estimated losses (1,481)
---------
$ 7,074
=========
</TABLE>
- ---------------------
(1) The aggregate cost for federal income tax purposes is $8.6 million.
(2) An allowance for estimated loss has been provided to reduce the carrying
value of this mortgage to the Trust's estimate of net realizable value of
the collateral securing such note.
73
<PAGE> 74
SCHEDULE IV
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1, .................... $ 6,366 $ 10,989 $ 33,983
Additions
Funding of notes receivable ........ 2,000 -- --
Loans from sales of properties ..... 750 -- 365
Loan received in satisfaction
of profit participation, net
of discount ..................... -- -- 1,414
Amortization of
discount/(premium) .............. 27 39 (93)
Deductions
Collections of principal ........... (837) (1,080) (5,585)
Foreclosures ....................... -- (891) (10,095)
Prior existing loan assumed
by borrower ..................... -- -- (9,000)
Discount on payoff ................. -- (541) --
Write off of uncollectible
mortgage notes receivable ....... -- (2,150) --
Other .............................. (2) -- --
-------- -------- --------
Balance at December 31, .................. $ 8,304 $ 6,366 $ 10,989
======== ======== ========
</TABLE>
74
<PAGE> 75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
___________________________________
PART III
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Trustees
The affairs of Continental Mortgage and Equity Trust (the "Trust" or the
"Registrant") are managed by a Board of Trustees. The Trustees are elected at
the annual meeting of shareholders or appointed by the incumbent Board of
Trustees and serve until the next annual meeting of shareholders or until a
successor has been elected or approved.
The Trustees of the Trust are listed below, together with their ages, terms of
service, all positions and offices with the Trust or its advisor, Basic Capital
Management, Inc. ("BCM" or the "Advisor") their principal occupations, business
experience and directorships with other companies during the last five years or
more. The designation "Affiliated", when used below with respect to a Trustee,
means that the Trustee is an officer, director or employee of the Advisor or an
officer of the Trust. The designation "Independent", when used below with
respect to a Trustee, means that 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
in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business
Relationships".
TED P. STOKELY: Age 63, Trustee (Independent) (since April 1990) and Chairman
of the Board (since January 1995).
General Manager (since January 1995) of ECF Senior Housing Corporation,
a nonprofit corporation; General Manager (since January 1993) of Housing
Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid
Consultant (since January 1993) and paid Consultant (April 1992 to
December 1992) of Eldercare Housing Foundation ("Eldercare"), a
nonprofit corporation engaged in the acquisition of low income and
elderly housing; President (April 1992 to April 1994) of PSA Group (real
estate management and consulting); Executive Vice President (1987 to
1991) of Key Companies Inc., a publicly traded company that develops,
acquires and sells water and minerals; Trustee (April 1990 to August
1994) of National Income Realty Trust ("NIRT"); and 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").
75
<PAGE> 76
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
EDWARD L. TIXIER: Age 67, Trustee (Independent) (since July 1996).
Executive President (since 1996) of Tasa American Homes; Vice Chairman
Planning and Zoning Commission (since 1996) of Dripping Springs, Texas;
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: Age 57, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1993) of North American
Trading Company Ltd.; President and Chief Operating Officer (since 1992)
of Community Based Developers, Inc.; Development Officer and Loan
Manager (1986 to 1992) of the City of San Jose, California; Vice
President and Director of Programs (1967 to 1986) of Arpact, Inc., a
government contractor for small business development and trade; and
Director (since January 1995) of IORI and TCI.
EDWARD G. ZAMPA: Age 62, Trustee (Independent) (since January 1995).
General Partner (since 1976) of Edward G. Zampa and Company; and
Director (since January 1995) of IORI and TCI.
Board Committees
The Trust's Board of Trustees held twelve meetings during 1996. For such year,
no incumbent Trustee attended fewer than 75% of the aggregate of (i) the total
number of meetings held by the Board of Trustees during the period for which he
had been a Trustee and (ii) the total number of meetings held by all committees
of the Board of Trustees on which he served during the period that he served.
The Trust's Board of Trustees has an Audit Committee, the function of which is
to review the Trust's operating and accounting procedures. The current members
of the Audit Committee, all of whom are Independent Trustees, are Messrs.
Stokely, Tixier and White. The Audit Committee met 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 the terms of any
engagement or compensation of
76
<PAGE> 77
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Board Committees (Continued)
the Advisor or its affiliates. The Relationship with Advisor Committee met
twice in 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 met twice in 1996.
The Trust's Board of Trustees does not have Nominating or Compensation
Committees.
Executive Officers
The following persons currently serve as executive officers of the Trust:
Randall M. Paulson, President; Bruce A. Endendyk, Executive Vice President; and
Thomas A. Holland, Executive Vice President and Chief Financial Officer. Their
positions with the Trust are not subject to a vote of shareholders. Their
ages, terms of service, all positions and offices with the Trust or BCM, other
principal occupations, business experience and directorships with other
companies during the last five years or more are set forth below.
RANDALL M. PAULSON: Age 50, President (since August 1995) and 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"),
the managing general partner of Syntek Asset Management, L.P. ("SAMLP"),
which is the general partner of National Realty, L.P. ("NRLP") and
National Operating, L.P. ("NOLP") and (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: Age 48, Executive Vice President (since January 1995).
President (since January 1995) of Carmel Realty, Inc. ("Carmel Realty"),
a company owned by Syntek West, Inc. ("SWI"); Executive Vice President
(since January 1995) of BCM, SAMI, ART, IORI and TCI; Management
Consultant (November 1990 to December 1994); Executive Vice President
(January 1989 to November 1990) of Southmark Corporation ("Southmark");
President and Chief Executive Officer (March 1988 to January 1989) of
Southmark Equities Corporation; and Vice President/Resident Manager
(December 1975 to March 1988) of Coldwell Banker Commercial/Real Estate
Services in Houston, Texas.
77
<PAGE> 78
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Executive Officers (Continued)
THOMAS A. HOLLAND: Age 54, Executive Vice President and Chief 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 BCM, SAMI, 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 (December 1986 to June 1990) of
Southmark; Vice President-Finance (January 1986 to December 1986) of
Diamond Shamrock Chemical Company; Assistant Controller (May 1976 to
January 1986) of Maxus Energy Corporation (formerly Diamond Shamrock
Corporation); Trustee (August 1989 to June 1990) of Arlington Realty
Investors; and Certified Public Accountant (since 1970).
Officers
Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust: 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.
MARK W. BRANIGAN: Age 42, Senior Vice President - Residential Asset 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 ART, IORI,
TCI and SAMI; Executive Vice President (since May 1995) and Real Estate
Analyst (January 1992 to May 1994) of BCM; Executive Vice President
(1984 to 1991) of Byron Investments, Inc.; Director (May 1989 to August
1990) and Manager of Treasury Services (May 1981 to 1983) of Southmark;
and Director (1977 to April 1981) of Investor Relations for Syntek Corp.
78
<PAGE> 79
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Officers (Continued)
LYNN W. HUMPHRIES: Age 46, Senior Vice President - Commercial Asset Management
(since May 1996).
Senior Vice President - Commercial Asset Management (since May 1996) of
BCM, ART, IORI, TCI 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: Age 44, Senior Vice President and General Counsel (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; Senior Vice President and General
Counsel (since January 1995), Vice President (January 1993 to January
1995) and Secretary (since December 1989) of ART; Senior Vice President
and General Counsel (since November 1994), Vice President and Corporate
Counsel (November 1989 to November 1994) and Secretary (since November
1989) of BCM; Senior Vice President and General Counsel (since January
1995), Vice President (April 1990 to January 1995) and Secretary (since
December 1990) of SAMI; Vice President (December 1990 to February 1994)
and Secretary (December 1993 to February 1994) of NIRT and VPT; and
Director (February 1987 to October 1989) and General Counsel and
Secretary (1985 to October 1989) of Red Eagle Resources Corporation (oil
and gas); Assistant General Counsel, Senior Staff Attorney and Staff
Attorney (1981 to 1985) of Texas International Company (oil and gas).
DREW D. POTERA: Age 37, Vice President (since December 1996) and Treasurer
(since December 1990).
Vice President (since December 1996) and Treasurer (since December 1990)
of IORI and TCI; Vice President (since December 1996), Treasurer (since
August 1991) and Assistant Treasurer (December 1990 to August 1991) of
ART; Vice President, Treasurer and Securities Manager (since July 1990)
of BCM; Vice President and Treasurer (since February 1992) of SAMI;
Treasurer (December 1990 to February 1994) of NIRT and VPT; and
Financial Consultant with Merrill Lynch, Pierce, Fenner & Smith
Incorporated (June 1985 to June 1990).
In addition to the foregoing officers, the Trust has several vice presidents
and assistant secretaries who are not listed herein.
79
<PAGE> 80
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
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 1996. All of these filing requirements were satisfied by its
Trustees and executive officers and ten percent holders. In making these
statements, the Trust has relied on the written representations of its
incumbent Trustees and executive officers and its ten percent holders and
copies of the reports that they have filed with the Commission.
The Advisor
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the day-to-
day operations of the Trust are performed by a contractual advisor under the
supervision of the Trust's Board of Trustees. The duties of the advisor
include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities
for the Trust. The advisor also serves as a consultant to the 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, 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 Trust's Advisory Agreement with BCM require the approval of the
Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales and acquisitions, lending, foreclosure and
borrowing activity, and other investments, and the Advisor is required to
report quarterly to the Trust's Board of Trustees on the Trust's performance
against the business plan. In addition, all transactions or investments by the
Trust shall require prior approval by the Trust's Board of Trustees unless they
are
80
<PAGE> 81
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to the Advisor by the Trust's Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides that the Advisor
shall be deemed to be in a fiduciary relationship to the Trust's shareholders;
contains a broad standard governing the Advisor's liability for losses by the
Trust; and contains guidelines for the Advisor's allocation of investment
opportunities as among itself, the Trust and other entities it advises.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average of the gross
asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by the Trust during such fiscal year
exceeds the sum of: (i) the cost of each such property as originally recorded
in the Trust's books for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (ii) capital improvements made to such
assets during the period owned by the Trust, and (iii) all closing costs,
(including real estate commissions) incurred in the sale of such property;
provided, however, no incentive fee shall be paid unless (a) such real estate
sold in such fiscal year, in the aggregate, has produced an 8% simple annual
return on the Trust's net investment including capital improvements, calculated
over the Trust's holding period before depreciation and inclusive of operating
income and sales consideration and (b) the aggregate net operating income from
all real estate owned by the Trust for each of the prior and current fiscal
years shall be at least 5% higher in the current fiscal year than in the prior
fiscal year.
Additionally, pursuant to the Advisory Agreement, BCM or an affiliate of BCM is
to receive an acquisition commission for supervising the acquisition, purchase
or long-term lease of real estate for the Trust equal to the lesser of (i) up
to 1% of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers or (ii) the compensation customarily charged in arm's-
length transactions by others rendering similar property acquisition services
as an ongoing public activity in the same geographical location and for
comparable property; provided that the aggregate purchase price of each
property (including acquisition fees and all real estate brokerage commissions)
may not exceed such property's appraised value at acquisition.
81
<PAGE> 82
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust; 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 $589,000 of the annual advisory fee for 1996.
Additionally, if the Trust were to request that BCM render services to the
Trust other than those required by the Advisory Agreement, BCM or an affiliate
of BCM will be separately compensated for such additional services on terms to
be agreed upon from time to time. As discussed below, under "Property
Management", the Trust has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."),
an affiliate of BCM, to provide property management for the Trust's properties.
Also as discussed below, under "Real Estate Brokerage" the Trust has engaged
Carmel Realty, also an affiliate of BCM, on a non-exclusive basis, to perform
brokerage services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of the Trust.
82
<PAGE> 83
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
The directors and principal officers of BCM are set forth below.
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
Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene E.
Phillips' son. Gene E. Phillips serves as a representative of the trust
established for the benefit of his children which owns BCM and, in such
capacity, Mr. Phillips has substantial contact with the management of BCM and
input with respect to its performance of advisory services to the Trust.
Property Management
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently Carmel, Ltd. provides such property
management services for a fee of 5% or less of the monthly gross rents
collected on the properties under its management. Carmel, Ltd. subcontracts
with other entities for the provision of the property-level management services
to the Trust at various rates. The general partner of Carmel, Ltd. is BCM.
The limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the
sole shareholder, (ii) Mr. Phillips and, (iii) a trust for the benefit of the
children of Mr. Phillips.
83
<PAGE> 84
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Real Estate Brokerage
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.
Since December 1, 1992, Carmel Realty has been engaged, on a non-exclusive
basis, to provide brokerage services for the Trust. Carmel Realty is entitled
to receive a commission for property acquisitions and sales by the Trust in
accordance with the following sliding scale of total fees to be paid by the
Trust: (i) maximum fee of 5% on the first $2.0 million of any purchase or sale
transaction of which no more than 4% would be paid to Carmel Realty or
affiliates; (ii) maximum fee of 4% on transaction amounts between $2.0 million
- - $5.0 million of which no more than 3% would be paid to Carmel Realty or
affiliates; (iii) maximum fee of 3% on transaction amounts between $5.0 million
- - $10.0 million of which no more than 2% would be paid to Carmel Realty or
affiliates; and (iv) maximum fee of 2% on transaction amounts in excess of
$10.0 million of which no more than 1 1/2% would be paid to Carmel Realty or
affiliates.
ITEM 11. EXECUTIVE COMPENSATION
The Trust has no employees, payroll or benefit plans and pays no compensation
to the executive officers of the Trust. The executive officers of the Trust
who are also officers or employees of BCM, the Trust's Advisor, are compensated
by the Advisor. Such executive officers of the Trust perform a variety of
services for the Advisor and the amount of their compensation is determined
solely by the Advisor. BCM does not allocate the cash compensation of its
officers among the various entities for which it serves as advisor. See Item
10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor"
for a more detailed discussion of the compensation payable to BCM by the Trust.
The only remuneration paid by the Trust is to the Trustees who are not officers
or directors of BCM or its affiliated companies. The Independent Trustees (i)
review the business plan of the Trust to determine that it is in the best
interest of the Trust's shareholders, (ii) review the Trust's contract with the
advisor, (iii) supervise the performance of the Trust's advisor and review the
reasonableness of the compensation which the Trust pays to its advisor in terms
of the nature and quality of services performed, (iv) review the reasonableness
of the total fees and expenses of the Trust and (v) select, when necessary, a
qualified independent real estate appraiser to appraise properties acquired by
the Trust.
Each Independent Trustee receives compensation in the amount of $15,000 per
year, plus reimbursement for expenses and the Chairman of the Board
84
<PAGE> 85
ITEM 11. EXECUTIVE COMPENSATION (Continued)
receives an additional $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 1996, $121,634 was paid to the Independent Trustees in total Trustees'
fees for all services, including the annual fee for service during the period
January 1, 1996 through December 31, 1996, and 1996 special service fees as
follows: Geoffrey C. Etnire, $20,833; John P. Parsons, $21,883; Bennett B.
Sims, $19,917; Ted P. Stokely, $18,167; Edward L. Tixier, $7,500; Martin L.
White, $16,667; and Edward G. Zampa, $16,667.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
85
<PAGE> 86
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Performance Graph
The following performance graph compares the cumulative total shareholder
return on the Trust's shares of beneficial interest with the Standard & Poor's
500 Stock Index ("S&P 500 Index") and the National Association of Real Estate
Investment Trusts, Inc. Hybrid REIT Total Return Index ("REIT Index"). The
comparison assumes that $100 was invested on December 31, 1991 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
[GRAPH]
<TABLE>
<CAPTION>
================================================================================
1991 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THE TRUST 100 89 194 235 237 273
- --------------------------------------------------------------------------------
S&P 500 INDEX 100 108 118 120 165 203
- --------------------------------------------------------------------------------
REIT INDEX 100 117 141 147 181 234
================================================================================
</TABLE>
86
<PAGE> 87
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of the Trust's shares of beneficial interest, both
beneficially and of record, both individually and in the aggregate, for those
persons or entities known by the Trust to be beneficial owners of more than 5%
of its shares of beneficial interest as of the close of business on March 7,
1997.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- --------------------------- ----------------- ----------
<S> <C> <C>
American Realty Trust, Inc. 1,633,819 40.6%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Basic Capital Management, Inc. 517,329 12.7%
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231
- -------------------------
</TABLE>
(1) Percentages are based upon 4,026,376 shares of beneficial interest
outstanding at March 7, 1997.
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 7, 1997.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
- --------------------------- ----------------- ----------
<S> <C> <C>
All Trustees and Executive 2,151,148 (2) 53.4%
Officers as a group (7 individuals)
</TABLE>
- -------------------------
(1) Percentage is based upon 4,026,376 shares of beneficial interest issued
and outstanding at March 7, 1997.
(2) Includes 1,633,819 shares owned by ART and 517,329 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 of
ART and BCM. The Trust's executive officers disclaim beneficial
ownership of such shares. Each of the directors of ART, may be deemed
to be beneficial owners of the shares owned by ART by virtue of their
positions as directors of ART. Each of the directors of BCM may be
deemed to be beneficial owners of the shares owned by BCM by virtue of
their positions as directors of BCM. The directors of ART and BCM
disclaim such beneficial ownership.
87
<PAGE> 88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Trust's Board of Trustees voted to retain BCM as the
Trust's advisor. See ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor." BCM is a company of which Messrs. Paulson, Endendyk
and Holland serve as executive officers. Gene E. Phillips served as a director
of BCM until December 22, 1989 and as Chief Executive Officer of BCM until
September 1, 1992. BCM is owned by a trust for the benefit of the children of
Mr. Phillips. Mr. Phillips serves as a representative of his children's trust
which owns BCM and, in such capacity, has substantial contact with the
management of BCM and input with respect to its performance of advisory
services to the Trust.
Since February 1, 1991, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel, Ltd. provides such property
management services. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole
shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of 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 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 and SAMI.
From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid
Consultant and since January 1, 1993 as a part-time unpaid Consultant for
Eldercare, a nonprofit corporation engaged in the acquisition of low income and
elderly housing. Eldercare has a revolving loan commitment from SWI, of which
Mr. Phillips is the sole shareholder. Eldercare filed for bankruptcy
protection in July 1993, and was dismissed from bankruptcy in October 1994.
Eldercare again filed for bankruptcy protection in May 1995, and was dismissed
from bankruptcy in February 1996.
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related
88
<PAGE> 89
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions (Continued)
parties. The Trust's management believes that all of the related party
transactions represented the best investments available at the time and were at
least as advantageous to the Trust as could have been obtained from unrelated
third parties.
As more fully described in ITEM 2. "PROPERTIES - Real Estate," the Trust is
engaged with NIRT in the Sacramento Nine and Indcon, L.P. partnerships.
In September 1990, the Trust's Board of Trustees authorized the purchase of up
to $2.0 million of the common shares of ART through negotiated or open market
transactions. The executive officers of the Trust also serve as executive
officers of ART. BCM, the Trust's advisor, also serves as advisor to ART and
at March 7, 1997 ART owned approximately 40.6% of the Trust's outstanding
shares of beneficial interest. At December 31, 1996, the Trust owned 818,088
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. See
ITEM 2. "PROPERTIES - Equity Investments in Real Estate Entities."
In December 1990, the Trust's Board of Trustees authorized the purchase of up
to $1.0 million of the shares of beneficial interest of NIRT and up to $1.0
million of the shares of TCI common stock through negotiated or open market
transactions. The Trustees of the Trust serve as directors of TCI. The
executive officers of the Trust also serve as executive 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. In December 1996, the Trust sold its NIRT
shares to NIRT for $1.1 million in cash. The Trust received net cash of
$550,000 after the payoff of margin debt secured by the NIRT shares. The Trust
recognized a gain of $725,000 on the sale. At 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 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. See
ITEM 2. "PROPERTIES - Equity Investments in Real Estate Entities."
In 1996, the Trust paid BCM and its affiliates $1.7 million in advisory fees,
$4.2 million in real estate brokerage commissions, $333,000 in mortgage
brokerage and equity refinancing fees, and $1.0 million in property and
construction management fees and leasing commissions (net of property
management fees paid to subcontractors, other than Carmel Realty). In
addition, as provided in the Advisory Agreement, BCM received cost
reimbursements from the Trust of $825,000 in 1996.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
89
<PAGE> 90
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions
The Trust's Declaration of Trust provides that:
"The Trustees shall not...purchase, sell or lease any Real Properties or
Mortgages to or from...the Advisor or any of [its] Affiliates," and that
[t]he Trustees shall not...make any loan to...the Advisor or any of
[its] Affiliates."
The Declaration of Trust further provides that:
"The Trust shall not purchase or lease, directly or indirectly, any Real
Property or purchase any Mortgage from the Advisor or any affiliated
Person, or any partnership in which any of the foregoing may also be a
general partner, and the Trust will not sell or lease, directly or
indirectly, any of its Real Property or sell any Mortgage to any of the
foregoing Persons." The Declaration of Trust further provides that "the
Trust shall not directly or indirectly, engage in any transaction with
any Trustee, officer or employee of the Trust or any director, officer
or employee of the Advisor...or of any company or other organization of
which any of the foregoing is an Affiliate, except for...[among other
things] transactions with...the Advisor or Affiliates thereof involving
loans, real estate brokerage services, real property management
services, the servicing of Mortgages, the leasing of real or personal
property, or other services, provided such transactions are on terms not
less favorable to the Trust than the terms on which nonaffiliated
parties are then making similar loans or performing similar services for
comparable entities in the same area and are not entered into on an
exclusive basis."
The Declaration of Trust further provides that:
"The Trustees shall not...invest in any equity Security, including the
shares of other REITs for a period in excess of 18 months, except for
shares of a qualified REIT subsidiary, as defined in Section 856(I) of
the Internal Revenue Code, and regular or residual interests in
REMICs...[or] acquire Securities in any company holding investments or
engaging in activities prohibited by this Section..."
The Declaration of Trust defines "Affiliate" as follows:
"As to any Person, any other Person who owns beneficially, directly or
indirectly, 1% or more of the outstanding capital stock, shares, or
equity interests of such Person or of any other Person which controls,
is controlled by, or is under common control with, such Person or is an
officer, retired officer, director, employee, partner, or trustee
(excluding independent trustees not otherwise affiliated with the
entity) of such Person or of any other Person which controls, is
controlled by, or is under common control with, such Person."
90
<PAGE> 91
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
From 1990 until January 1995, all related party transactions that the Trust
entered into were required to be reviewed by the Related Party Transaction
Committee of the Trust's Board of Trustees to determine whether such
transactions were (i) fair to the Trust and (ii) were permitted by the Trust's
governing documents. Each of the members of the Related Party Transaction
Committee was a Trustee who was not an officer, director or employee of BCM,
the Trust's advisor, and was not an officer or employee of the Trust. The
Related Party Transaction Committee was terminated by the Trust's Board of
Trustees on January 11, 1995.
Pursuant to the terms of the Modification of Stipulation of Settlement (the
"Modification") in the Olive Litigation, as more fully discussed in ITEM 3.
"LEGAL PROCEEDINGS - Olive Litigation," which became effective on January 11,
1995, certain related party transactions which the Trust may enter into prior
to April 28, 1999, require the unanimous approval of the Trust's Board of
Trustees. In addition, such related party transactions are to be discouraged
and may only be entered into in exceptional circumstances and after a
determination by the Trust's Board of Trustees that the transaction is in the
best interests of the Trust and that no other opportunity exists that is as
good as the opportunity presented by such transaction.
The Modification requirements for related party transactions do not apply to
direct contractual agreements for services between the Trust and the Advisor or
one of its affiliates, (including the Advisory Agreement, the Brokerage
Agreement and the property management contracts). These agreements, pursuant
to the specific terms of the Modification, require the prior approval by two-
thirds of the Trustees of the Trust, and if required, approval by a majority of
the Trust's shareholders. The Modification requirements for related party
transactions also do not apply to joint ventures between or among the Trust and
IORI, NIRT or TCI or any of their affiliates or subsidiaries and a third party
having no prior or intended future business or financial relationship with Mr.
Phillips, Mr. Friedman, the Advisor, or any affiliate of such parties. Such
joint ventures may be entered into on the affirmative vote of a majority of the
Trustees of the Trust.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
91
<PAGE> 92
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets -
December 31, 1996 and 1995
Consolidated Statements of Operations -
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this report:
Exhibit
Number Description
- ------- -----------------------------------------------------------------
3.0 Second Amended and Restated Declaration of Trust (incorporated by
reference to the Registrant's Current Report on Form 8-K dated
August 14, 1987).
3.1 Amendment No. 1 to Second Amended and Restated Declaration of
Trust, (incorporated by reference to the Registrant's Current
Report on Form 8-K dated July 5, 1989) reporting change in name
of Trust.
92
<PAGE> 93
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -------------------------------------------------------------
<S> <C>
3.2 Amendment No. 2 to Second Amended and Restated Declaration of
Trust (incorporated by reference to the Registrant's Current
Report on Form 8-K dated March 22, 1990) reporting deletion of
liquidation provision.
3.3 Amendment No. 3 to Second Amended and Related Declaration of
Trust (incorporated by reference to the Registrant's Current
Report on Form 8-K dated May 31, 1996) reporting the repeal of
the limitation on the period of time equity securities may be
held and repeal on the limitation on investments in unimproved,
non-income producing properties.
3.4 Restated Trustees' Regulations dated as of April 21, 1989
(incorporated by reference to the current report on Form 8-K
dated March 24, 1989).
10.0 Advisory Agreement dated as of March 7, 1995, between Continental
Mortgage and Equity Trust and Basic Capital Management, Inc.,
(incorporated by reference to Exhibit No. 10.0 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
27.0 Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated November 5, 1996, was filed
with respect to Item 2. "Acquisition or Disposition of Assets,"
and Item 7. "Financial Statements and Exhibits," which reports
the acquisition of the Glenwood Apartments, which as amended on
Form 8-K/A, filed January 6, 1997.
A Current Report on Form 8-K, dated December 13, 1996, was filed
with respect to Item 2. "Acquisition or Disposition of Assets,"
and Item 7. "Financial Statements and Exhibits," which reports
the acquisition of the Oak Run Apartments, the Northpoint Central
Office Building and 2626 Cole Office Building, which was amended
on Form 8-K/A, filed February 11, 1997, and which was further
amended on Form 8-K/A Amendment No. 2 filed March 11, 1997.
93
<PAGE> 94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONTINENTAL MORTGAGE AND EQUITY TRUST
Dated: March 14, 1997 By: /s/ Randall M. Paulson
------------------------------ ----------------------------------
Randall M. Paulson
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By: /s/ Ted P. Stokely By: /s/ Martin L. White
--------------------------------- ----------------------------------
Ted P. Stokely Martin L. White
Chairman of the Board Trustee
and Trustee
By: /s/ Edward L. Tixier By: /s/ Edward G. Zampa
--------------------------------- ----------------------------------
Edward L. Tixier Edward G. Zampa
Trustee Trustee
By: /s/ Thomas A. Holland
---------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: March 14, 1997
-----------------------------
94
<PAGE> 95
CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------------- ------
<S> <C>
27.0 Financial Data Schedule.
</TABLE>
95
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,961
<SECURITIES> 6,192
<RECEIVABLES> 8,555
<ALLOWANCES> 1,481
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 237,636
<DEPRECIATION> 17,438
<TOTAL-ASSETS> 250,010
<CURRENT-LIABILITIES> 0
<BONDS> 160,554
0
0
<COMMON> 0
<OTHER-SE> 79,183
<TOTAL-LIABILITY-AND-EQUITY> 250,010
<SALES> 0
<TOTAL-REVENUES> 44,244
<CGS> 0
<TOTAL-COSTS> 26,738
<OTHER-EXPENSES> 4,819
<LOSS-PROVISION> (884)
<INTEREST-EXPENSE> 12,773
<INCOME-PRETAX> 7,914
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,914
<DISCONTINUED> 0
<EXTRAORDINARY> 812
<CHANGES> 0
<NET-INCOME> 8,726
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 2.08
</TABLE>
