<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998
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Commission File Number 0-10503
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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, TX 75231
-----------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Shares of Beneficial Interest,
no par value 4,017,150
- ------------------------------ ---------------------------------
(Class) (Outstanding at October 30, 1998)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of Continental Mortgage and Equity Trust (the "Trust"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
consolidated results of operations, consolidated financial position and
consolidated cash flows at the dates and for the periods indicated, have been
included.
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Assets
Notes and interest receivable
Performing ....................................... $ 2,642 $ 2,853
Nonperforming, nonaccruing ....................... 2,257 2,257
------------ ------------
4,899 5,110
Less - allowance for estimated losses ............... (1,456) (1,481)
------------ ------------
3,443 3,629
Foreclosed real estate held for sale, net of
accumulated depreciation ($699 in 1998 and $725
in 1997) ......................................... 5,022 5,670
Real estate under contract for sale, net of
accumulated depreciation ($3,024 in 1997) ........ -- 5,940
Real estate held for investment, net of accumulated
depreciation ($23,567 in 1998 and $19,393 in 1997) 288,814 250,084
Investment in marketable equity securities of
affiliates, at market ............................ 13,571 13,042
Cash and cash equivalents ........................... 4,397 3,088
Other assets (including $535 in 1998 and $791 in
1997 from affiliates) ............................ 15,778 17,917
------------ ------------
$ 331,025 $ 299,370
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 3
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes and interest payable ................................. $ 234,744 $ 199,712
Other liabilities (including $2,381 in 1997 to
affiliates) ............................................. 8,966 11,615
------------ ------------
243,710 211,327
Commitments and contingencies
Shareholders' equity
Shares of Beneficial Interest, no par value;
authorized shares, unlimited; issued and out-
standing, 4,017,150 shares in 1998 and 4,021,470
shares in 1997 .......................................... 8,045 8,054
Paid-in capital ............................................ 257,042 257,101
Accumulated distributions in excess of accumulated
earnings ................................................ (189,986) (188,849)
Net unrealized gains on marketable equity
securities of affiliates ................................ 12,214 11,737
------------ ------------
87,315 88,043
------------ ------------
$ 331,025 $ 299,370
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Revenue
Rentals .................... $ 16,539 $ 14,425 $ 47,287 $ 40,630
Interest ................... 168 263 539 729
---------- ---------- ---------- ----------
16,707 14,688 47,826 41,359
Expenses
Property operations ........ 9,987 8,445 27,421 23,576
Interest ................... 5,992 4,350 16,149 12,245
Depreciation ............... 2,005 1,586 6,074 4,563
Advisory fee to affiliate .. 632 548 1,838 1,552
Net income fee to affiliate (140) (99) 58 287
General and administrative . 504 817 1,648 2,219
---------- ---------- ---------- ----------
18,984 15,647 53,183 44,442
---------- ---------- ---------- ----------
(Loss) from operations ........ (2,273) (959) (5,357) (3,083)
Equity in income (loss) of
partnerships ............... 38 (17) 108 56
Gain (loss) on sale of real
estate ..................... 454 (245) 5,916 6,565
---------- ---------- ---------- ----------
Net income (loss) ............. $ (1,781) $ (1,221) $ 667 $ 3,538
========== ========== ========== ==========
Earnings per share
Net income (loss) .......... $ (.44) $ (.30) $ .17 $ .88
========== ========== ========== ==========
Weighted average shares of
beneficial interest used in
computing earnings per share 4,012,507 4,025,985 4,011,072 4,026,061
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Distributions Accumulated
Shares of in Excess of Other
Beneficial Interest Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
--------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1998 ................ 4,021,470 $ 8,054 $ 257,101 $ (188,849) $ 11,737 $ 88,043
Comprehensive Income
Net income .......... -- -- -- 667 -- 667
Unrealized gains on
marketable equity
securities ....... -- -- -- -- 477 477
---------
1,144
Repurchase of shares of
beneficial interest . (15,000) (30) (210) -- -- (240)
Shares of beneficial
interest sold under
dividend reinvestment
plan ................ 10,902 21 151 -- -- 172
Fractional shares ...... (222) -- -- -- -- --
Distributions ($.45
per share) .......... -- -- -- (1,804) -- (1,804)
--------- ---------- ---------- ---------- ---------- ----------
Balance, September 30,
1998 ................ 4,017,150 $ 8,045 $ 257,042 $ (189,986) $ 12,214 $ 87,315
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 6
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected ................................. $ 47,246 $ 40,397
Interest collected .............................. 384 784
Interest paid ................................... (14,773) (11,343)
Payments for property operations ................ (28,070) (21,533)
General and administrative expenses paid ........ (2,107) (2,640)
Advisory and net income fee paid to affiliate ... (2,146) (2,986)
Distributions from partnerships' operating cash
flow ......................................... 80 228
Other ........................................... (1,351) (564)
------------ ------------
Net cash (used in) provided by operating
activities ............................... (737) 2,343
Cash Flows from Investing Activities
Acquisition of real estate ...................... (46,917) (19,579)
Real estate improvements ........................ (4,345) (3,759)
Proceeds from sale of real estate ............... 22,156 14,388
Sale of notes receivable ........................ 304 --
Funding of notes receivable ..................... -- (73)
Collections on notes receivable ................. 375 2,339
Distributions from partnerships' investing
activities ................................... -- 36
Deposits on pending acquisitions and financings . (77) (898)
Deferred financing costs ........................ (2,147) (525)
Deposits on proposed merger ..................... (440) --
------------ ------------
Net cash (used in) investing activities ...... (31,091) (8,071)
Cash Flows from Financing Activities
Distributions to shareholders ................... (1,804) (1,570)
Proceeds from notes payable and margin borrowings 62,844 28,105
Payments on notes payable ....................... (27,835) (23,850)
Repurchase of shares of beneficial interest ..... (240) --
Shares of beneficial interest sold under dividend
reinvestment plan ............................ 172 --
------------ ------------
Net cash provided by financing activities .... 33,137 3,685
------------ ------------
Net increase (decrease) in cash and cash
equivalents ..................................... 1,309 (2,043)
Cash and cash equivalents, beginning of period ..... 3,088 2,961
------------ ------------
Cash and cash equivalents, end of period ........... $ 4,397 $ 918
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 7
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities
Net income ......................................... $ 667 $ 3,538
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation .................................... 6,074 4,563
Gain on sale of real estate ..................... (5,916) (6,565)
(Increase) decrease in interest receivable ...... (82) 208
Decrease in other assets ........................ 1,918 403
Increase (decrease) in other liabilities ........ (3,402) 24
Increase in interest payable .................... 32 --
Distributions from partnerships' operating cash
flow ......................................... 80 228
Equity in (income) of partnerships .............. (108) (56)
---------- ----------
Net cash (used in) provided by operating
activities ............................... $ (737) $ 2,343
========== ==========
Noncash investing and financing activities
Notes payable from acquisition of real estate ... $ -- $ 8,056
Unrealized gain on marketable equity securities . 477 6,010
Note receivable from sale of real estate ........ 467 --
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
<PAGE> 8
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the nine month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. Dollar amounts in tables are in thousands. For further
information, refer to the Consolidated Financial Statements and Notes thereto
included in the Trust's Annual Report on Form 10-K for the year ended December
31, 1997 ("1997 Form 10-K").
Certain balances for 1997 have been reclassified to conform to the 1998
presentation.
NOTE 2. MORTGAGE NOTES RECEIVABLE
As more fully discussed in NOTE 4. "NOTES PAYABLE," seven of the Trust's
mortgage notes receivable, with a combined principal balance of $1.4 million at
December 31, 1997, were pledged as additional collateral on a $2.3 million loan,
primarily secured by the AMOCO Office Building in New Orleans, Louisiana. In
March 1998, the loan was refinanced and the collateral notes were released.
In April 1998, the Trust sold five mortgage notes secured by single-family
residences located in Arizona and Hawaii for $319,000 in cash. The Trust
received net cash of $304,000 after the payment of various closing costs. The
Trust recognized no gain or loss on the sale.
NOTE 3. REAL ESTATE
In January 1998, the Trust completed the sale of the 353 unit Edgewood
Apartments in Lansing, Illinois, that was under contract for sale at December
31, 1997. The apartment complex was sold for $12.1 million in cash, with the
Trust receiving net cash of $2.3 million after paying off $9.3 million in
mortgage debt and the payment of various closing costs. The Trust paid a real
estate brokerage commission of $302,000 to Carmel Realty, Inc. ("Carmel
Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Trust's
advisor. The Trust recognized a gain of $5.6 million on the sale.
Also in January 1998, the Trust purchased the McKinney 36 land, 36.4 acres of
undeveloped land in Collin County, Texas, for $2.1 million in cash. The Trust
paid a real estate brokerage commission of $82,000 to Carmel Realty and a
property acquisition fee of $21,000 to BCM.
In March 1998, the Trust purchased the 1010 Common Building, a 494,579
sq. ft. office building in New Orleans, Louisiana, for $14.5 million.
The building was acquired subject to ground leases that expire from
8
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CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3. REAL ESTATE (Continued)
November 2029 to April 2069. The Trust paid $6.3 million in cash and obtained
new mortgage financing of $8.2 million. The lender has committed to fund an
additional $3.8 million for tenant improvements. The mortgage bears interest at
9.7% per annum, requires monthly payments of interest only and matures in April
2001. The Trust paid a real estate brokerage commission of $337,500 to Carmel
Realty and a property acquisition fee of $145,000 to BCM. In April 1998, the
Trust purchased four of the ground leases for $200,000 in cash.
Also in March 1998, the Trust purchased the 225 Baronne Building, a 416,834 sq.
ft. office building in New Orleans, Louisiana, for $11.2 million. The Trust paid
$3.8 million in cash and obtained new mortgage financing of $7.4 million. The
lender has committed to fund an additional $1.6 million for tenant improvements.
The mortgage bears interest at 9.7% per annum, requires monthly payments of
interest only and matures in April 2001. The Trust paid a real estate brokerage
commission of $288,000 to Carmel Realty and a property acquisition fee of
$112,000 to BCM.
Further in March 1998, the Trust sold 4050 Getwell, a 112,382 sq. ft. industrial
warehouse in Memphis, Tennessee, for $2.1 million in cash. The Trust received
net cash of $1.2 million after paying off $793,000 in mortgage debt and the
payment of various closing costs. The Trust paid a real estate brokerage
commission of $81,500 to Carmel Realty. The Trust recognized no gain or loss on
the sale.
In April 1998, the Trust purchased the 338 unit Fontenelle Hills Apartments in
Bellevue, Nebraska, for $12.8 million. The Trust paid $2.0 million in cash and
obtained new mortgage financing of $10.8 million. The mortgage bears interest at
7.16% per annum, requires monthly payments of principal and interest of $73,017
and matures in May 2008. The Trust paid a real estate brokerage commission of
$311,000 to Carmel Realty and a property acquisition fee of $128,000 to BCM.
Also in April 1998, the Trust purchased the Whisenant land, 16.802 acres of
undeveloped land in Collin County, Texas, for $600,000 in cash. The Trust paid a
real estate brokerage commission of $24,000 to Carmel Realty and an acquisition
fee of $6,000 to BCM.
In May 1998, the Trust sold the Pinemont Professional Building, a 19,685 sq. ft.
office building in Houston, Texas, for $570,000. The Trust received net cash of
$57,000 and provided $467,000 of seller financing in the form of a wraparound
mortgage note. The note bears interest at 10.4% per annum, requires monthly
payments of principal and interest of $6,281 and matures in July 2008. The Trust
recognized a loss of $154,000 on the sale.
In July 1998, the Trust purchased the Solco Allen land, 55.725 acres of
undeveloped land in Collin County, Texas, for $1.3 million in cash. The
9
<PAGE> 10
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3. REAL ESTATE (Continued)
Trust paid a real estate brokerage commission of $53,000 to Carmel Realty and an
acquisition fee of $13,000 to BCM.
Also in July 1998, the Trust purchased the Sandison land, 100.171 acres of
undeveloped land in Collin County, Texas, for $4.7 million in cash. The Trust
paid a real estate brokerage commission of $95,000 to Carmel Realty and an
acquisition fee of $47,000 to BCM.
In August 1998, the Trust purchased the 1013 Common land, 18,000 sq. ft. of
developed land in New Orleans, Louisiana, for $582,000 in cash. The Trust paid a
real estate brokerage commission of $23,000 to Carmel Realty and an acquisition
fee of $6,000 to BCM.
In September 1998, the Trust sold the 113,638 sq. ft. Rio Pinar Shopping Center
in Orlando, Florida, for $8.8 million in cash. The Trust received $3.1 million
in cash after paying off $5.1 million in mortgage debt and the payment of
various closing costs. The Trust paid a real estate brokerage commission of
$246,000 to Carmel Realty. The Trust recognized a gain of $478,000 on the sale.
During 1998, the Trust expended $636,000 to rebuild an industrial warehouse in
Atlanta, Georgia that had been destroyed by fire in 1996. Construction was
completed in the third quarter of 1998.
NOTE 4. NOTES PAYABLE
In January 1998, the Trust refinanced the mortgage debt secured by the Promenade
Shopping Center in Highlands Ranch, Colorado in the amount of $7.7 million. The
Trust received net cash of $2.1 million after paying off $5.4 million in
existing mortgage debt, the funding of required escrows and the payment of
various closing costs. The new mortgage bears interest at 7.42% per annum,
requires monthly payments of principal and interest of $56,502 and matures in
January 2008. The Trust paid a mortgage brokerage and equity refinancing fee of
$77,000 to BCM.
In March 1998, the Trust refinanced the mortgage debt in the amount of $15.0
million secured by the AMOCO Office Building in New Orleans, Louisiana, and by
seven mortgage notes receivable. The Trust received net cash of $10.9 million
after paying off $3.8 million in existing mortgage debt and the payment of
various closing costs associated with the financing. The lender has committed to
fund an additional $1.0 million in tenant improvements. The new mortgage bears
interest at 8.7% per annum, requires monthly payments of interest only and
matures in April 2001. The Trust paid a mortgage brokerage and equity
refinancing fee of $150,000 to BCM.
The mortgage debt secured by the AMOCO, 1010 Common and 225 Baronne Office
Buildings in New Orleans, Louisiana are cross-collateralized and cross
defaulted. Both the Trust and BCM have guaranteed repayment of
10
<PAGE> 11
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4. NOTES PAYABLE (Continued)
the debt. Also, the Trust has committed to borrow an additional $163.0 million
during the period ending March 2000 from the lender. In exchange for this
commitment, the lender may record a second lien mortgage on the office buildings
of up to $2.0 million. $1.0 million of this lien will be released upon the
lender funding an additional $63.0 million in new loans to the Trust or BCM
affiliated entities, with the remaining $1.0 million released pro rata as the
remaining $100.0 million in new loans is funded. At September 30, 1998, $156.2
million of the borrowing commitment remained to be satisfied.
Also in March 1998, the Trust refinanced the mortgage debt secured by the
McCallum Crossing Apartments in Dallas, Texas in the amount of $8.4 million. The
Trust received net cash of $1.8 million after paying off $6.3 million in
existing mortgage debt and the payment of various closing costs. The new
mortgage bears interest at 7.19% per annum, requires monthly payments of
principal and interest of $56,961 and matures in April 2008. The Trust paid a
mortgage brokerage and equity refinancing fee of $84,000 to BCM.
In April 1998, the Trust obtained mortgage financing secured by its unencumbered
McKinney 36 land in Collin County, Texas in the amount of $2.1 million. The
Trust received net cash of $2.0 million after the payment of various closing
costs. The new mortgage bears interest at 9.25% per annum, requires monthly
payments of interest only and matures in April 2000. The Trust paid a mortgage
brokerage and equity refinancing fee of $21,000 to BCM.
In May 1998, the Trust refinanced the mortgage debt secured by the Willow Wick
Apartments in North Augusta, South Carolina in the amount of $2.1 million. The
Trust received net cash of $1.1 million after paying off $854,000 in existing
mortgage debt and the payment of various closing costs. The new mortgage bears
interest at 7.205% per annum, requires monthly payments of principal and
interest of $13,990 and matures in June 2008. The Trust paid a mortgage
brokerage and equity refinancing fee of $21,000 to BCM.
In July 1998, concurrent with the purchases of the Solco Allen and Whisenant
land, as discussed in NOTE 3. "REAL ESTATE," the Trust obtained mortgage
financing in the amount of $5.2 million secured by the Solco Allen, Sandison and
the Whisenant land, all in Collin County, Texas. The mortgage bears interest at
9.25% per annum, requires monthly payments of interest only and matures in April
2000.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Trust is involved in various lawsuits arising in the ordinary course of
business. Management of the Trust 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.
11
<PAGE> 12
ITEM 2. 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 first, wraparound and junior mortgage loans. The Trust
was organized on August 27, 1980 and commenced operations on December 3, 1980.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $4.4 million at September 30, 1998,
compared with $3.1 million at December 31, 1997. The principal reasons for the
increase in cash are discussed in the paragraphs below.
The Trust's principal sources of cash have been and will continue to be property
operations, proceeds from property sales, principal payments on mortgage notes
receivable and borrowings. The Trust expects the net cash provided by its
operations and from external sources, such as property sales, financings and
refinancings, will be sufficient to meet the Trust's various cash needs,
including, but not limited to, debt service obligations, shareholder
distributions and property maintenance and improvements.
The Trust's cash flow from property operations (rents collected less payments
for expenses applicable to rental income) increased from $18.9 million in the
first nine months of 1997 to $19.4 million in the first nine months of 1998. Of
this net increase, $1.1 million is the result of the Trust having acquired five
apartment complexes and six commercial properties during 1997 and 1998 and an
additional $1.7 million due to increased rental and occupancy rates primarily at
the Trust's commercial properties. These increases were partially offset by a
decrease of $2.1 million due to the sale of four commercial properties in 1997
and one apartment complex and three commercial properties in 1998. The Trust's
management believes that the Trust's cash flow from property operations will
continue to increase as the Trust continues to benefit from the properties
acquired in the last three months of 1997 and first nine months of 1998.
In January 1998, the Trust sold the 353 unit Edgewood Apartments in Lansing,
Illinois, for $12.1 million in cash. The Trust received net cash of $2.3 million
after paying off the then existing mortgage debt and the payment of various
closing costs.
Also in January 1998, the Trust refinanced the mortgage debt secured by the
Promenade Shopping Center in Highlands Ranch, Colorado in the amount of $7.7
million. The Trust received net cash of $2.1 million after paying off the then
existing mortgage debt.
Further in January 1998, the Trust purchased the McKinney 36 land, 36.4 acres of
undeveloped land in Collin County, Texas, for $2.1 million in
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
cash. In April 1998, the Trust obtained mortgage financing secured by such land
in the amount of $2.1 million. The Trust received net cash from the financing of
$2.0 million.
In March 1998, the Trust purchased the 494,579 sq. ft. 1010 Common
Office Building in New Orleans, Louisiana, for $14.5 million consisting
of $6.3 million in cash and mortgage financing of $8.2 million.
Also in March 1998, the Trust purchased the 416,834 sq. ft. 225 Baronne
Office Building in New Orleans, Louisiana, for $11.2 million consisting
of $3.8 million in cash and mortgage financing of $7.4 million.
In March 1998, the Trust refinanced the mortgage debt in the amount of $15.0
million secured by the AMOCO Office Building in New Orleans, Louisiana, and by
seven mortgage notes receivable. The Trust received net cash of $10.9 million
after paying off the then existing mortgage debt.
The mortgage debt secured by the above three New Orleans Office Buildings is
cross-collateralized and cross defaulted. Both the Trust and Basic Capital
Management, Inc. ("BCM"), the Trust's advisor, have guaranteed repayment of the
debt. The Trust committed to borrow an additional $163.0 million from the lender
during the period ending March 2000, of which $156.2 million of the borrowing
commitment at September 30, 1998, remained to be satisfied. In exchange for this
commitment, the lender may record a second lien mortgage on the New Orleans
office buildings of up to $2.0 million. $1.0 million of this lien will be
released upon the lender funding an additional $63.0 million in new loans to the
Trust or BCM affiliated entities, with the remaining $1.0 million released pro
rata as the remaining $100.0 million in new loans is funded.
Also in March 1998, the Trust sold the 112,382 sq. ft. 4050 Getwell Industrial
Warehouse in Memphis, Tennessee, for $2.1 million in cash. The Trust received
net cash of $1.2 million after paying off the then existing mortgage debt and
the payment of various closing costs.
Further in March 1998, the Trust refinanced the mortgage debt secured by the
McCallum Crossing Apartments in Dallas, Texas, in the amount of $8.4 million.
The Trust received net cash of $1.8 million after paying off the then existing
mortgage debt.
In April 1998, the Trust purchased the 338 unit Fontenelle Hills Apartments in
Bellevue, Nebraska, for $12.8 million, consisting of $2.0 million in cash and
mortgage financing of $10.8 million.
Also in April 1998, the Trust purchased the Whisenant land, 16.802 acres of
undeveloped land in Collin County, Texas, for $600,000 in cash.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In May 1998, the Trust refinanced the mortgage debt secured by the Willow Wick
Apartments in North Augusta, South Carolina in the amount of $2.1 million. The
Trust received net cash of $1.1 million after paying off the then existing
mortgage debt.
In July 1998, the Trust purchased the Solco Allen land, 55.725 acres of
undeveloped land in Collin County, Texas, for $1.3 million in cash.
Also in July 1998, the Trust purchased the Sandison land, 100.171 acres of
undeveloped land in Collin County, Texas, for $4.7 million in cash.
Subsequent to these purchases, the Trust obtained mortgage financing in the
amount of $5.2 million secured by the Solco Allen, Sandison and Whisenant land,
all in Collin County, Texas. The Trust received net cash of $4.9 million after
the payment of closing costs.
In August 1998, the Trust purchased the 1013 Common land, 18,000 sq. ft.
of developed land in New Orleans, Louisiana, for $582,000 in cash.
In September 1998, the Trust sold the 113,638 sq. ft. Rio Pinar Shopping Center
in Orlando, Florida, for $8.8 million in cash. The Trust received $3.1 million
in cash after paying off the existing mortgage debt and the payment of various
closing costs.
In December 1989, the Trust's Board of Trustees authorized the Trust to
repurchase a total of 1,465,000 of its shares of beneficial interest. The Trust
completed the authorized repurchases during the first quarter of 1998. The Trust
repurchased such shares at a total cost to the Trust of $7.8 million. In April
1998, the Trust's Board of Trustees authorized the Trust to repurchase an
additional 200,000 of its shares of beneficial interest. No shares have been
repurchased under this authorization.
In the first nine months of 1998, the Trust paid quarterly distributions of $.45
per share or a total of $1.8 million and sold 10,902 shares of beneficial
interest through its dividend reinvestment plan for a total of $172,000.
Management reviews the carrying values of the Trust's properties and mortgage
notes receivable at least annually and whenever 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 mortgage note receivable
review includes an evaluation of the collateral property securing such note.
The property review generally includes selective property inspections,
discussions with the manager of the
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
property and visits to selected properties in the surrounding area and a review
of the following: (i) the property's current rents compared to market rents;
(ii) the property's expenses; (iii) the property's maintenance requirements;
and, (iv) the property's cash flow.
Results of Operations
The Trust reported a net loss of $1.8 million and net income of $667,000 for the
three and nine months ended September 30, 1998, which includes gains on sale of
real estate of $454,000 and $5.9 million. For the three months ended September
30, 1997, the Trust reported a net loss of $1.2 million including a $245,000
loss on the sale of real estate. The Trust reported net income of $3.5 million
for the nine months ended September 30, 1997, which included gains on sale of
real estate of $6.8 million. Fluctuations in these and other components of the
Trust's revenues and expenses between the 1997 and 1998 periods are discussed
below.
Rents increased from $14.4 million and $40.6 million for the three and nine
months ended September 30, 1997, to $16.5 million and $47.3 million for the
three and nine months ended September 30, 1998. Of these increases, $692,000 and
$4.6 million is attributable to the acquisition of 4 apartment complexes and 8
commercial properties in 1997, and $1.5 million and $3.2 million is attributable
to the acquisition of one apartment complex and two commercial properties in
1998. Increases of $883,000 and $3.4 million are due to increased rental and
occupancy rates at the Trust's apartment complexes and commercial properties.
These increases are partially offset by decreases of $429,000 and $2.7 million
due to the sale of 4 commercial properties in 1997 and decreases of $743,000 and
$2.0 million due to the sale of an apartment complex and three commercial
properties during 1998. Rents are expected to continue to increase due to
revenues from properties acquired in 1998 and higher rental and occupancy rates.
Interest income was $263,000 and $729,000 for the three and nine months ended
September 30, 1997, compared to $168,000 and $539,000 for the three and nine
months ended September 30, 1998. These decreases are due to the sale of five
mortgage notes receivable in 1998 and the payoff of five mortgage notes
receivable in 1997, partially offset by an increase in short-term investment
income. Interest income in the fourth quarter of 1998 is expected to approximate
that of the third quarter of 1998.
Property operating expenses increased from $8.4 million and $23.6 million for
the three and nine months ended September 30, 1997, to $10.0 million and $27.4
million for the three and nine months ended September 30, 1998. Of these
increases, $632,000 and $2.7 million is due to the acquisition of 4 apartment
complexes and 8 commercial properties in 1997 and $1.4 million and $2.7 million
is due to the acquisitions of one apartment complex and two commercial
properties in 1998. These increases are partially offset by decreases of
$308,000 and $1.7
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
million due to the sale of four commercial properties in 1997 and decreases of
$482,000 and $1.0 million due to the sale of an apartment complex and three
commercial properties during 1998. Property operating expenses are expected to
continue to increase due to properties acquired in 1998.
Interest expense increased from $4.4 million and $12.2 million for the three and
nine months ended September 30, 1997 to $6.0 million and $16.1 million for the
three and nine months ended September 30, 1998. Of these increases, $1.1 million
and $3.8 million is due to interest expense recorded on mortgages secured by
fifteen properties, encumbered by debt, acquired in 1997 and six properties,
encumbered by debt, acquired in 1998. An additional $740,000 and $1.1 million is
due to interest expense recorded on borrowings in 1997 and 1998, secured by
mortgages on one previously unencumbered commercial property and a note
receivable in 1997 and three parcels of undeveloped land in 1998 and the
refinancing of six existing mortgages in 1997 and four existing mortgages in
1998 where the loan balance was increased. These increases are partially offset
by decreases of $294,000 and $1.5 million due to the sale of four commercial
properties in 1997 and an apartment complex and three commercial properties in
1998. Interest expense in the fourth quarter of 1998 is expected to approximate
that of the third quarter of 1998.
Depreciation expense increased from $1.6 million and $4.6 million for the three
and nine months ended September 30, 1997 to $2.0 million and $6.1 million for
the three and nine months ended September 30, 1998. These increases are due to
the acquisition of 4 apartment complexes and 8 commercial properties in 1997 and
one apartment complex and two commercial properties in 1998, partially offset by
the sale of four commercial properties in 1997 and an apartment complex and
three commercial properties in 1998. Depreciation is expected to increase during
the fourth quarter of 1998, as a result of depreciation on the properties
acquired in the fourth quarter of 1997 and the properties acquired in the first
nine months of 1998.
Advisory fee to affiliate increased from $548,000 and $1.6 million for the three
and nine months ended September 30, 1997 to $632,000 and $1.8 million for the
three and nine months ended September 30, 1998. This increase is due to an
increase in the Trust's gross assets, the basis for the advisory fee, as a
result of property acquisitions in 1997 and in 1998 partially offset by the sale
of four commercial properties in 1997 and an apartment complex and three
commercial properties in 1998. The advisory fee is expected to continue to
increase as the Trust makes additional property acquisitions.
For the three months ended September 30, 1998, the Trust recorded a net income
fee credit of $140,000 and for the nine months ended September 30, 1998, the
Trust recorded a net income fee of $58,000. A net income
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
fee credit of $99,000 and a net income fee of $287,000 were recorded for the
three and nine months ended September 30, 1997. The net income fee is 7.5% of
the Trust's net income.
General and administrative expenses decreased from $817,000 and $2.2 million for
the three and nine months ended September 30, 1997, to $504,000 and $1.6 million
for the three and nine months ended September 30, 1998. These decreases are
primarily attributable to a decrease in legal fees related to the Olive
litigation, partially offset by an increase in Advisor cost reimbursements.
The Trust's equity in earnings of partnerships was a loss of $17,000 and income
of $56,000 for the three and nine months ended September 30, 1997, as compared
to income of $38,000 and $108,000 for the three and nine months ended September
30, 1998. The increase is due primarily to a loss recorded in 1997 on the sale
of an industrial property by one of the equity partnerships.
For the nine months ended September 30, 1998, the Trust recognized a net gain on
the sale of real estate of $5.9 million, $5.6 million of such gain being from
the sale of the Edgewood Apartments in January 1998, a loss of $154,000 on the
sale of the Pinemont Professional Building in May 1998 and a gain of $454,000 on
the sale of the Rio Pinar Shopping Center in September 1998. See NOTE 3. "REAL
ESTATE." For the three months ended September 30, 1997, the Trust recognized a
loss of $245,000 on the sale of Builders Square Shopping Center. For the nine
months ended September 30, 1997, the Trust also recognized gains on the sale of
real estate totaling $6.8 million, $5.4 million on the sale of Tollhill West
Office Building in April 1997 and $1.4 million on the sale of 2626 Cole Office
Building in May 1997.
Tax Matters
As more fully discussed in the Trust's 1997 Form 10-K, the Trust has elected and
in the opinion of the Trust's management, qualified to be taxed as a Real Estate
Investment Trust ("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 and 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.
Inflation
The effects of inflation on the Trust's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Inflation (Continued)
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. To the extent that
inflation affects interest rates, the Trust's earnings from short-term
investments and the cost of new borrowings as well as its existing variable rate
borrowings will be affected.
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.
Year 2000
BCM, the Trust's advisor, has informed the Trust that its computer hardware
operating system and computer software have been certified as year 2000
compliant.
Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM,
that performs property management services for the Trust's properties, has
informed the Trust that it is currently testing year 2000 compliant property
management computer software for the Trust's commercial properties. Carmel, Ltd.
expects to begin utilizing such software January 1, 1999. With regards to the
Trust's apartment properties, Carmel, Ltd. has informed the Trust that its
subcontractors either have in place or will have in place in the first quarter
of 1999, year 2000 compliant property management computer software.
The Trust has not incurred, nor does it expect to incur, any costs related to
its accounting and property management computer software being modified,
upgraded or replaced in order to make it year 2000 compliant. Such costs have
been or will be borne by either BCM, Carmel, Ltd. or the property management
subcontractors of Carmel, Ltd.
Management has not completed its evaluation of the Trust's computer controlled
building systems, such as security, elevators, heating and
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Year 2000 (Continued)
cooling, etc., to determine what systems are not year 2000 compliant. Management
does not believe that any necessary modifications to such systems will require
significant expenditures or cause interruptions in operations, as such enhanced
operating systems are readily available.
The Trust has or will have in place the year 2000 compliant systems that will
allow it to operate. The risks the Trust faces are that certain of its vendors
will not be able to supply goods or services and that financial institutions and
taxing authorities will not be able to accurately apply payments made to them.
Management believes that other vendors are readily available and that financial
institutions and taxing authorities will, if necessary, apply monies received
manually. The likelihood of the above having a significant impact on the Trust's
operations is negligible.
--------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Olive Litigation. In February 1990, the Trust, together with Income Opportunity
Realty Investors, Inc., National Income Realty Trust and Transcontinental Realty
Investors, Inc., 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. pending before the United States District Court for
the Northern District of California and relating to the operation and management
of each of the entities (the "Olive Litigation"). 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 "Olive Modification") that settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and that modified certain provisions of the April 1990 settlement.
The Olive 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 Olive Modification was January 11, 1995.
The Court retained jurisdiction to enforce the Olive Modification, and during
August and September 1996, the Court held evidentiary hearings to assess
compliance with the terms of the Olive Modification by various parties. The
Court issued no ruling or order with respect to the matters addressed at the
hearings.
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<PAGE> 20
ITEM 1. LEGAL PROCEEDINGS (Continued)
Separately, in 1996, legal counsel for the plaintiffs notified the Trust's Board
of Trustees that he intended to assert that certain actions taken by the Board
of Trustees breached the terms of the Olive Modification. On January 27, 1997,
the parties entered into an Amendment to the Olive Modification, effective
January 9, 1997 (the "Olive Amendment"), which was submitted to the Court for
approval on January 29, 1997. The Olive 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. On May 2, 1997, a hearing was held for
the Court to consider approval of the Olive Amendment. As a result of the
hearing, the parties entered into a revised Olive Amendment. The Court issued an
order approving the Olive Amendment on July 3, 1997.
The Olive Amendment provided for the addition of four new unaffiliated members
to the Trust's Board of Trustees and set 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 Olive 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 Olive
Amendment. The Olive 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 pro rata to
the votes cast by all non-affiliated shareholders of the Trust.
In accordance with the Olive Amendment, Richard W. Douglas, Larry E. Harley and
R. Douglas Leonhard were added to the Trust's Board of Trustees in January 1998
and Murray Shaw was added to the Trust's Board of Trustees in February 1998.
ITEM 5. OTHER INFORMATION
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. On
February 10, 1998, the incorporation proposal was considered by the Trust's
current Board of Trustees and was unanimously approved by such Board members.
However, after evaluating the various alternative methods to accomplish
conversion, the Trust's Board of Trustees approved a proposed merger of the
Trust and Transcontinental Realty Investors, Inc. ("TCI").
Proposed Merger with Transcontinental Realty Investors, Inc.
On September 25, 1998, the Trust and TCI jointly announced the agreement
of their respective Boards for the Trust to be acquired by TCI. Under
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<PAGE> 21
ITEM 5. OTHER INFORMATION (Continued)
Proposed Merger with Transcontinental Realty Investors, Inc. (Continued)
the proposal, TCI would acquire all of the Trust's outstanding shares of
beneficial interest, in a tax free exchange, for shares of its Common Stock. TCI
would issue 1.181 shares of its Common Stock for each outstanding share of
beneficial interest of the Trust. Upon the exchange of shares the Trust would
merge into TCI. The share exchange and merger are subject to the negotiation of
a definitive merger agreement and a vote of the shareholders of both entities.
TCI has the same Board and advisor as the Trust.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
10.0 Advisory Agreement dated as of October 15, 1998, between
Continental Mortgage and Equity Trust and Basic Capital
Management, Inc., filed herewith.
27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated September 21, 1998, was
filed September 28, 1998, with respect to Item 5. "Other
Events," which reports the agreement of the respective Boards of
Continental Mortgage and Equity Trust and Transcontinental
Realty Investors, Inc. ("TCI") to form a single consolidated
entity with TCI as its survivor.
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<PAGE> 22
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL MORTGAGE AND EQUITY TRUST
Date: November 12, 1998 By: /s/ Randall M. Paulson
------------------------- --------------------------
Randall M. Paulson
President
Date: November 12, 1998 By: /s/ Thomas A. Holland
------------------------- -------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
<PAGE> 23
CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ --------------------------------------------------------------------------------------------------- ------
<S> <C> <C>
10.0 Advisory Agreement dated as of October 15, 1998 between Continental Mortgage and Equity Trust and 24
Basic Capital Management, Inc.
27.0 Financial Data Schedule. 53
</TABLE>
23
<PAGE> 1
EXHIBIT 10.0
ADVISORY AGREEMENT
BETWEEN
CONTINENTAL MORTGAGE AND EQUITY TRUST
AND
BASIC CAPITAL MANAGEMENT, INC.
THIS AGREEMENT dated as of October 15, 1998, between Continental
Mortgage and Equity Trust, a California real estate investment trust (the
"Trust"), and Basic Capital Management, Inc., a Nevada corporation (the
"Advisor")
W I T N E S S E T H:
WHEREAS:
1. The Company owns a complex, diversified portfolio of real estate,
mortgages and other assets, including many non-performing or troubled assets.
2. The Company is an active real estate investment trust with funds
available for investment primarily in the acquisition of income-producing real
estate and to a lesser extent in short and medium term mortgages.
3. The Advisor and its employees have extensive experience in the
administration of real estate assets and the origination, structuring and
evaluation of real estate and mortgage investments.
<PAGE> 2
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties agree as follows:
1. DUTIES OF THE ADVISOR. Subject to the supervision of the Board of
Trustees, the Advisor will be responsible for the day-to-day operations of the
Trust and, subject to Section 17 hereof, shall provide such services and
activities relating to the assets, operations and business plan of the Trust as
may be appropriate, including:
(a) preparing and submitting an annual budget and business
plan for approval by the Board of the Trust (the "Business Plan");
(b) using its best efforts to present to the Trust a
continuing and suitable investment program consistent with the investment
policies and objectives of the Trust as set forth in the Business Plan;
(c) using its best efforts to present to the Trust investment
opportunities consistent with the Business Plan and such investment program as
the Trustees may adopt from time to time;
(d) furnishing or obtaining and supervising the performance of
the ministerial functions in connection with the administration of the
day-to-day operations of the Trust, including
25
<PAGE> 3
the investment of reserve funds and surplus cash in short-term
money market investments;
(e) serving as the Trust's investment and financial advisor
and providing research, economic, and statistical data in connection with the
Trust's investments and investment and financial policies;
(f) on behalf of the Trust, investigating, selecting and
conducting relations with borrowers, lenders, mortgagors, brokers, investors,
builders, developers and others; provided however, that the Advisor shall not
retain on the Trust's behalf any consultants or third party professionals, other
than legal counsel, without prior Board approval;
(g) consulting with the Trustees and furnishing the Trustees
with advice and recommendations with respect to the making, acquiring (by
purchase, investment, exchange, or otherwise), holding, and disposition (through
sale, exchange, or otherwise) of investments consistent with the Business Plan
of the Trust;
(h) obtaining for the Trustees such services as may be
required in acquiring and disposing of investments, disbursing and collecting
the funds of the Trust, paying the debts and fulfilling the obligations of the
Trust, and handling, prosecuting, and
26
<PAGE> 4
settling any claims of the Trust, including foreclosing and
otherwise enforcing mortgage and other liens securing investments;
(i) obtaining for and at the expense of the Trust such
services as may be required for property management, loan disbursements, and
other activities relating to the investments of the Trust, provided, however,
the compensation for such services shall be agreed to by the Trust and the
service provider;
(j) advising the Trust in connection with public or private
sales of shares or other securities of the Trust, or loans to the Trust, but in
no event in such a way that the Advisor could be deemed to be acting as a broker
dealer or underwriter;
(k) quarterly and at any other time requested by the Trustees,
making reports to the Trustees regarding the Trust's performance to date in
relation to the Trust's approved Business Plan and its various components, as
well as the Advisor's performance of the foregoing services;
(l) making or providing appraisal reports, where appropriate,
on investments or contemplated investments of the Trust;
(m) assisting in preparation of reports and other documents
necessary to satisfy the reporting and other requirements
27
<PAGE> 5
of any governmental bodies or agencies and to maintain effective
communications with shareholders of the Trust; and
(n) doing all things necessary to ensure its ability to render
the services contemplated herein, including providing office space and office
furnishings and personnel necessary for the performance of the foregoing
services as Advisor, all at its own expense, except as otherwise expressly
provided for herein.
2. NO PARTNERSHIP OR JOINT VENTURE. The Trust and the Advisor are not
partners or joint venturers with each other, and nothing herein shall be
construed so as to make them such partners or joint venturers or impose any
liability as such on either of them.
3. RECORDS. At all times, the Advisor shall keep proper books of
account and records of the Trust's affairs which shall be accessible for
inspection by the Trust at any time during ordinary business hours.
4. ADDITIONAL OBLIGATIONS OF THE ADVISOR. The Advisor shall refrain
from any action (including, without limitation, furnishing or rendering services
to tenants of property or managing or operating real property) that would (a)
adversely affect the status of the Trust as a real estate investment trust, as
defined and limited in Sections 856-860 of the Internal Revenue Code, (b)
28
<PAGE> 6
violate any law, rule, regulation, or statement of policy of any governmental
body or agency having jurisdiction over the Trust or over its securities, (c)
cause the Trust to be required to register as an investment company under the
Investment Company Act of 1940, or (d) otherwise not be permitted by the
Declaration of Trust of the Trust.
5. BANK ACCOUNTS. The Advisor may establish and maintain one or more
bank accounts in its own name, and may collect and deposit into any such account
or accounts, and disburse from any such account or accounts, any money on behalf
of the Trust, under such terms and conditions as the Trustees may approve,
provided that no funds in any such account shall be commingled with funds of the
Advisor; and the Advisor shall from time to time render appropriate accounting
of such collections and payments to the Trustees and to the auditors of the
Trust.
6. BOND. The Advisor shall maintain a fidelity bond with a responsible
surety company in such amount as may be required by the Trustees from time to
time, covering all directors, officers, employees, and agents of the Advisor
handling funds of the Trust and any investment documents or records pertaining
to investments of the Trust. Such bond shall inure to the benefit of the Trust
in
29
<PAGE> 7
respect to losses of any such property from acts of such directors, officers,
employees, and agents through theft, embezzlement, fraud, negligence, error, or
omission or otherwise, the premium for said bond to be at the expense of the
Trust.
7. INFORMATION FURNISHED ADVISOR. The Trustees shall have the right to
change the Business Plan at any time, effective upon receipt by the Advisor of
notice of such change. The Trust shall furnish the Advisor with a certified copy
of all financial statements, a signed copy of each report prepared by
independent certified public accountants, and such other information with regard
to the Trust's affairs as the Advisor may from time to time reasonably request.
8. CONSULTATION AND ADVICE. In addition to the services described
above, the Advisor shall consult with the Trustees, and shall, at the request of
the Trustees or the officers of the Trust, furnish advice and recommendations
with respect to any aspect of the business and affairs of the Trust, including
any factors that in the Advisor's best judgment should influence the policies of
the Trust.
9. ANNUAL BUSINESS PLAN AND BUDGET. No later than January 15th of each
year, the Advisor shall submit to the Trustees a
30
<PAGE> 8
written Business Plan for the current Fiscal Year of the Trust. Such Business
Plan shall include a twelve-month forecast of operations and cash flow with
explicit assumptions and a general plan for asset sales or acquisitions,
lending, foreclosure and borrowing activity, other investments or ventures and
proposed securities offerings or repurchases or any proposed restructuring of
the Trust. To the extent possible, the Business Plan shall set forth the
Advisor's recommendations and the basis therefor with respect to all material
investments of the Trust. Upon approval by the Board of Trustees, the Advisor
shall be authorized to conduct the business of the Trust in accordance with the
explicit provisions of the Business Plan, specifically including the borrowing,
leasing, maintenance, capital improvements, renovations and sale of investments
set forth in the Business Plan. Any transaction or investment not explicitly
provided for in the approved Business Plan shall require the prior approval of
the Board of Trustees unless made pursuant to authority expressly delegated to
the Advisor. Within sixty (60) days of the end of each calendar quarter, the
Advisor shall provide the Board of Trustees with a report comparing the Trust's
actual performance for such quarter against the Business Plan.
31
<PAGE> 9
10. DEFINITIONS. As used herein, the following terms shall have the
meanings set forth below:
(a) "Affiliate" shall mean, as to any Person, any other Person
who owns beneficially, directly, or indirectly, 1% or more of the outstanding
capital stock, shares or equity interests of such Person or of any other Person
which controls, is controlled by, or is under common control with such Person or
is an officer, retired officer, director, employee, partner, or trustee
(excluding non-interested trustees not otherwise affiliated with the entity) of
such Person or of any other Person which controls, is controlled by, or is under
common control with, such Person.
(b) "Appraised Value" shall mean the value of a Real Property
according to an appraisal made by an independent qualified appraiser who is a
member in good standing of the American Institute of Real Estate Appraisers and
is duly licensed to perform such services in accordance with the applicable
state law, or, when pertaining to Mortgage Loans, the value of the underlying
property as determined by the Advisor.
(c) "Book Value" of an asset or assets shall mean the value of
such asset or assets on the books of the Trust, before provision for
amortization, depreciation, depletion or valuation reserves and before deducting
any indebtedness or other liability
32
<PAGE> 10
in respect thereof, except that no asset shall be valued at more than its fair
market value as determined by the Trustees.
(d) "Book Value of Invested Assets" shall mean the Book Value
of the Trust's total assets (without deduction of any liabilities), but
excluding (i) goodwill and other intangible assets, (ii) cash, and (iii) cash
equivalent investments with terms which mature in one year or less.
(e) "Business Plan" shall mean the Trust's investment policies
and objectives and the capital and operating budget based thereon, approved by
the Board as thereafter modified or amended.
(f) "Fiscal Year" shall mean any period for which an income
tax return is submitted to the Internal Revenue Service and which is treated by
the Internal Revenue Service as a reporting period.
(g) "Gross Asset Value" shall mean the total assets of the
Trust after deduction of allowance for amortization, depreciation or depletion
and valuation reserves.
(h) "Mortgage Loans" shall mean notes, debentures, bonds, and
other evidences of indebtedness or obligations, whether negotiable or
non-negotiable, and which are secured or collateralized by mortgages, including
first, wraparound, construction and development, and junior mortgages.
33
<PAGE> 11
(i) "Net Asset Value" shall mean the Book Value of all the
assets of the Trust minus all the liabilities of the Trust.
(j) "Net Income" for any period shall mean the Net Income of
the Trust for such period computed in accordance with generally accepted
accounting principles after deduction of the Gross Asset Fee, but before
deduction of the Net Income Fee, as set forth in Sections 11 (a) and 11(b),
respectively, herein, and inclusive of gain or loss of the sale of assets.
(k) "Net Operating Income" shall mean rental income less
property operating expenses.
(l) "Person" shall mean and include individuals, corporations,
limited partnerships, general partnerships, joint stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other entities and governments and
agencies and political subdivisions thereof.
(m) "Real Property" shall mean and include land, rights in
land, leasehold interests (including but not limited to interests of a lessor or
lessee therein), and any buildings, structures, improvements, fixtures, and
equipment located on or used in connection with land, leasehold interests, and
rights in land or interests therein.
34
<PAGE> 12
All calculations made pursuant to this Agreement shall be based on
statements (which may be unaudited, except as provided herein) prepared on an
accrual basis consistent with generally accepted accounting principles,
regardless of whether the Trust may also prepare statements on a different
basis. All other terms shall have the same meaning as set forth in the Trust's
Declaration of Trust and Trustees' Regulations.
11. ADVISORY COMPENSATION.
(a) Gross Asset Fee. On or before the twenty-eighth day of each
month during the term hereof, the Trust shall pay to the Advisor, as
compensation for the basic management and advisory services rendered to the
Trust hereunder, a fee at the rate of .0625% per month of the average of the
Gross Asset Value of the Trust at the beginning and at the end of the next
preceding calendar month. Without negating the provisions of Sections 18, 19,
22 and 23 hereof, the annual rate of the Gross Asset Fee shall be .75% per
annum.
(b) Net Income Fee. As an incentive for successful investment and
management of the Trust's assets, the Advisor will be entitled to receive a fee
equal to 7.5% per annum of the Trust's Net Income for each Fiscal Year or
portion thereof for which the Advisor provides services. To the extent the Trust
has Net Income in a
35
<PAGE> 13
quarter, the 7.5% Net Income Fee is to be paid quarterly on or after the third
business day following the filing of the report on Form 10-Q with the Securities
and Exchange Commission, except for the payment for the fourth quarter, ended
December 31, which is to be paid on or after the third business day following
the filing of the report on Form 10-K with the Securities and Exchange
Commission. The 7.5% Net Income Fee is to be cumulative within any Fiscal Year,
such that if the Trust has a loss in any quarter during the Fiscal Year, each
subsequent quarter's payment during such Fiscal Year shall be adjusted to
maintain the 7.5% per annum rate, with final settlement being made with the
fourth quarter payment and in accordance with audited results for the Fiscal
Year. The 7.5% Net Income Fee is not cumulative from year to year.
(c) Acquisition Commission. For supervising the acquisition,
purchase or long term lease of Real Property for the Trust, the Advisor is to
receive an Acquisition Commission equal to the lesser of (i) up to 1% of the
cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated
brokers; or (ii) the compensation customarily charged in arm's-length
transactions by others rendering similar property acquisition services as an
ongoing public activity in the same geographical location and for comparable
property. The aggregate of each purchase price of each
36
<PAGE> 14
property (including the Acquisition Commissions and all real estate brokerage
fees) may not exceed such property's Appraised Value at acquisition.
(d) Incentive Sales Compensation. To encourage periodic sales
of appreciated Real Property at optimum value and to reward the Advisor for
improved performance of the Trust's Real Property, the Trust shall pay the
Advisor, on or before the 45th day after the close of each Fiscal Year, an
incentive fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all Real Property sold by the Trust during such Fiscal Year
exceeds the sum of: (i) the cost of each such Real Property as originally
recorded in the Trust's books for tax purposes (without deduction for
depreciation, amortization or reserve for losses), (ii) capital improvements
made to such assets during the period owned by the Trust and (iii) all closing
costs (including real estate commissions) incurred in the sale of such Real
Property; provided, however, no incentive fee shall be paid unless (a) such Real
Property sold in such Fiscal Year, in the aggregate, has produced an 8% simple
annual return on the Trust's net investment including capital improvements,
calculated over the Trust's holding period, before depreciation and inclusive of
operating income and sales consideration and (b) the aggregate Net Operating
Income from all
37
<PAGE> 15
Real Property owned by the Trust for all of the prior Fiscal Year and the
current Fiscal Year shall be at least 5% higher in the current Fiscal Year than
in the prior Fiscal Year.
(e) Mortgage or Loan Acquisition Fees. For the acquisition or
purchase from an unaffiliated party of any existing mortgage or loan by the
Trust, the Advisor or an Affiliate is to receive a Mortgage or Loan Acquisition
Fee equal to the lesser of (a) 1% of the amount of the mortgage or loan
purchased by the Trust or (b) a brokerage or commitment fee which is reasonable
and fair under the circumstances. Such fee will not be paid in connection with
the origination or funding by the Trust of any mortgage loan.
(f) Mortgage Brokerage and Equity Refinancing Fees. For
obtaining loans to the Trust or refinancing on Trust properties, the Advisor or
an Affiliate is to receive a Mortgage Brokerage and Equity Refinancing Fee equal
to the lesser of (a) 1% of the amount of the loan or the amount refinanced or
(b) a brokerage or refinancing fee which is reasonable and fair under the
circumstances; provided, however that no such fee shall be paid on loans from
the Advisor or an Affiliate without the approval of the Board of Trustees. No
fee shall be paid on loan extensions.
38
<PAGE> 16
12. LIMITATION ON THIRD PARTY MORTGAGE PLACEMENT FEES. The Advisor or
any of its Affiliates shall pay to the Trust, one-half of any compensation
received by the Advisor or any such Affiliate from third parties with respect to
the origination, placement or brokerage of any loan made by the Trust, provided,
however, the compensation retained by the Advisor or Affiliate shall not exceed
the lesser of (a) 2% of the amount of the loan committed by the Trust or (b) a
loan brokerage and commitment fee which is reasonable and fair under the
circumstances.
13. STATEMENTS. The Advisor shall furnish to the Trust not later than
the tenth day of each calendar month, beginning with the second calendar month
of the term of this Agreement, a statement showing the computation of the fees,
if any, payable in respect to the next preceding calendar month (or, in the case
of incentive compensation, for the preceding Fiscal Year, as appropriate) under
the Agreement. The final settlement of incentive compensation for each Fiscal
Year shall be subject to adjustment in accordance with, and upon completion of,
the annual audit of the Trust's financial statements; any payment by the Trust
or repayment by the Advisor that shall be indicated to be necessary in
accordance therewith shall be made promptly after the completion of such audit
and shall
39
<PAGE> 17
be reflected in the audited statements to be published by the
Trust.
14. COMPENSATION FOR ADDITIONAL SERVICES. If and to the extent that the
Trust shall request the Advisor or any director, officer, partner, or employee
of the Advisor to render services for the Trust other than those required to be
rendered by the Advisor hereunder, such additional services, if performed, will
be compensated separately on terms to be agreed upon between such party and the
Trust from time to time. In particular, but without limitation, if the Trust
shall request that the Advisor perform property management, leasing, loan
disbursement or similar functions, the Trust and the Advisor shall enter into a
separate agreement specifying the obligations of the parties and providing for
reasonable additional compensation to the Advisor for performing such services.
15. EXPENSES OF THE ADVISOR. Without regard to the amount of
compensation or reimbursement received hereunder by the Advisor, the Advisor
shall bear the following expenses:
(a) employment expenses of the personnel employed by the
Advisor (including Trustees, officers, and employees of the Trust who are
directors, officers, or employees of the Advisor or of any
40
<PAGE> 18
company that controls, is controlled by, or is under common control with the
Advisor), including, but not limited to, fees, salaries, wages, payroll taxes,
travel expenses, and the cost of employee benefit plans and temporary help
expenses except for those personnel expenses described in Sections 16(e) and
(p);
(b) advertising and promotional expenses incurred in
seeking investments for the Trust;
(c) rent, telephone, utilities, office furniture and
furnishings, and other office expenses of the Advisor and the Trust, except as
any of such expenses relates to an office maintained by the Trust separate from
the office of the Advisor; and
(d) miscellaneous administrative expenses relating to
performance by the Advisor of its functions hereunder.
16. EXPENSES OF THE TRUST. The Trust shall pay all of its expenses not
assumed by the Advisor and, without limiting the generality of the foregoing, it
is specifically agreed that the following expenses of the Trust shall be paid by
the Trust and shall not be paid by the Advisor:
(a) the cost of money borrowed by the Trust;
(b) income taxes, taxes and assessments on real property, and
all other taxes applicable to the Trust;
41
<PAGE> 19
(c) legal, auditing, accounting, underwriting, brokerage,
listing, registration and other fees, printing, and engraving and other
expenses, and taxes incurred in connection with the issuance, distribution,
transfer, registration, and stock exchange listing of the Trust's securities;
(d) fees, salaries, and expenses paid to officers, and
employees of the Trust who are not directors, officers or employees of the
Advisor, or of any company that controls, is controlled by, or is under common
control with the Advisor;
(e) expenses directly connected with the origination or
purchase of Mortgage Loans and with the acquisition, disposition, and ownership
of real estate equity interests or other property (including the costs of
foreclosure, insurance, legal, protective, brokerage, maintenance, repair, and
property improvement services) and including all compensation, traveling
expenses, and other direct costs associated with the Advisor's employees or
other personnel engaged in (i) real estate transaction legal services, (ii)
internal auditing, (iii) foreclosure and other mortgage finance services, (iv)
sale or solicitation for sale of mortgages, (v) engineering and appraisal
services, and (vi) transfer agent services;
42
<PAGE> 20
(f) expenses of maintaining and managing real estate
equity interests;
(g) insurance, as required by the Trustees (including
Trustees' liability insurance);
(h) the expenses of organizing, revising, amending,
converting, modifying, or terminating the Trust;
(i) expenses connected with payments of dividends or interest
or distributions in cash or any other form made or caused to be made by the
Trustees to holders of securities of the Trust;
(j) all expenses connected with communications to holders of
securities of the Trust and the other bookkeeping and clerical work necessary in
maintaining relations with holders of securities, including the cost of printing
and mailing certificates for securities and proxy solicitation materials and
reports to holders of the Trust's securities;
(k) the cost of any accounting, statistical, bookkeeping or
computer equipment or computer time necessary for maintaining the books and
records of the Trust and for preparing and filing Federal, State and Local tax
returns;
(l) transfer agent's, registrar's, and indenture
trustee's fees and charges;
43
<PAGE> 21
(m) legal, accounting, investment banking, and auditing fees
and expenses charged by independent parties performing these services not
otherwise included in clauses (c) and (e) of this Section 16;
(n) expenses incurred by the Advisor, arising from the sales
of Trust properties, including those expenses related to carrying out
foreclosure proceedings;
(o) commercially reasonable fees paid to the Advisor for
efforts to liquidate mortgages before maturity, such as the solicitation of
offers and negotiation of terms of sale;
(p) costs and expenses connected with computer services,
including but not limited to employee or other personnel compensation, hardware
and software costs, and related development and installation costs associated
therewith;
(q) costs and expenses associated with risk management
(i.e. insurance relating to the Trust's assets);
(r) loan refinancing compensation; and
(s) expenses associated with special services requested
by the Trustees pursuant to Section 14 hereof.
17. OTHER ACTIVITIES OF ADVISOR. The Advisor, its officers, directors,
or employees or any of its Affiliates may engage in other business activities
related to real estate investments or act
44
<PAGE> 22
as advisor to any other person or entity (including another real estate
investment trust), including those with investment policies similar to the
Trust, and the Advisor and its officers, directors, or employees and any of its
Affiliates shall be free from any obligation to present to the Trust any
particular investment opportunity that comes to the Advisor or such persons,
regardless of whether such opportunity is in accordance with the Trust's
Business Plan. However, to minimize any possible conflict, the Advisor shall
consider the respective investment objectives of, and the appropriateness of a
particular investment to each such entity in determining to which entity a
particular investment opportunity should be presented. If appropriate to more
than one entity, the Advisor shall present the investment opportunity to the
entity that has had sufficient uninvested funds for the longest period of time.
18. LIMITATION ON OPERATING EXPENSES. To the extent that the Operating
Expenses of the Trust for any Fiscal Year exceeds the limitation set forth in
the Trust's Declaration of Trust as amended from time to time, or any similar
limitation (if contained) in a successor Declaration of Trust or Certificate of
Incorporation, the Advisor shall refund to the Trust such portion of its fees
payable hereunder as may be required by such Section.
45
<PAGE> 23
19. TERM; TERMINATION OF AGREEMENT. This Agreement shall continue in
force until the next Annual Meeting of Shareholders of the Trust, and,
thereafter, it may be renewed from year to year, subject to any required
approval of the Shareholders of the Trust and, if any Trustee is an Affiliate of
the Advisor, the approval of a majority of the Trustees who are not so
affiliated. Notice of renewal shall be given in writing by the Trustees to the
Advisor not less than 60 days before the expiration of this Agreement or of any
extension thereof. This Agreement may be terminated for any reason without
penalty upon 60 days' written notice by the Trust to the Advisor or 120 days'
written notice by the Advisor to the Trust, in the former case by the vote of a
majority of the Trustees who are not Affiliates of the Advisor or by the vote of
holders of a majority of the outstanding shares of the Trust. Notwithstanding
the foregoing, however, in the event of any material change in the ownership,
control, or management of the Advisor, the Trust may terminate this Agreement
without penalty and without advance notice to the Advisor.
20. AMENDMENTS. This Agreement shall not be changed, modified,
terminated or discharged in whole or in part except by an
46
<PAGE> 24
instrument in writing signed by both parties hereto, or their respective
successors or assigns, or otherwise as provided herein.
21. ASSIGNMENT. This Agreement shall not be assigned by the Advisor
without the prior consent of the Trust. The Trust may terminate this Agreement
in the event of its assignment by the Advisor without the prior consent of the
Trust. Such an assignment or any other assignment of this Agreement shall bind
the assignee hereunder in the same manner as the Advisor is bound hereunder.
This Agreement shall not be assignable by the Trust without the consent of the
Advisor, except in the case of assignment by the Trust to a corporation,
association, trust, or other organization that is a successor to the Trust. Such
successor shall be bound hereunder and by the terms of said assignment in the
same manner as the Trust is bound hereunder.
22. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Trustees,
this Agreement shall be and become terminated immediately upon written notice of
termination from the Trustees to the Advisor if any of the following events
shall occur:
(a) If the Advisor shall violate any provision of this
Agreement, and after notice of such violation shall not cure such default within
30 days; or
47
<PAGE> 25
(b) If the Advisor shall be adjudged bankrupt or insolvent by
a court of competent jurisdiction, or an order shall be made by a court of
competent jurisdiction for the appointment of a receiver, liquidator, or trustee
of the Advisor or of all or substantially all of its property by reason of the
foregoing, or approving any petition filed against the Advisor for its
reorganization, and such adjudication or order shall remain in force or unstayed
for a period of 30 days; or
(c) If the Advisor shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the Federal
bankruptcy laws, or for relief under any law for the relief of debtors, or shall
consent to the appointment of a receiver of itself or of all or substantially
all its property, or shall make a general assignment for the benefit of its
creditors, or shall admit in writing its inability to pay its debts generally,
as they become due.
The Advisor agrees that if any of the events specified in subsections
(b) and (c) of this Section 22 shall occur, it will give written notice thereof
to the Trustees within seven days after the occurrence of such event.
23. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, pursuant to Sections 19, 21 or 22
48
<PAGE> 26
hereof, the Advisor shall not be entitled to compensation for further services
hereunder but shall be paid all compensation accruing to the date of
termination. The Advisor shall forthwith upon such termination:
(a) pay over to the Trust all monies collected and held for
the account of the Trust pursuant to this Agreement;
(b) deliver to the Trustees a full accounting, including a
statement showing all payments collected by it and a statement of any monies
held by it, covering the period following the date of the last accounting
furnished to the Trustees; and
(c) deliver to the Trustees all property and documents of the
Trust then in the custody of the Advisor.
24. MISCELLANEOUS. The Advisor shall be deemed to be in a fiduciary
relationship to the shareholders of the Trust. The Advisor assumes no
responsibility under this Agreement other than to render the services called for
hereunder in good faith, and shall not be responsible for any action of the
Trustees in following or declining to follow any advice or recommendations of
the Advisor. Neither the Advisor nor any of its shareholders, directors,
officers, or employees shall be liable to the Trust, the Trustees, the holders
of securities of the Trust or to any successor or assign of the Trust for any
losses arising from the
49
<PAGE> 27
operation of the Trust if the Advisor had determined, in good faith, that the
course of conduct which caused the loss or liability was in the best interests
of the Trust and the liability or loss was not the result of negligence or
misconduct by the Advisor. However, in no event will the directors, officers or
employees of the Advisor be personally liable for any act or failure to act
unless it was the result of such person's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
25. NOTICES. Any notice, report, or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report, or other communication is accepted by the party to
whom it is given, and shall be given by being delivered at the following
addresses of the parties hereto:
50
<PAGE> 28
The Trustees and/or the Trust:
Continental Mortgage and Equity Trust
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President
The Advisor:
Basic Capital Management, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: Executive Vice President and
Chief Financial Officer
Either party may at any time give notice in writing to the other party
of a change of its address for the purpose of this Section 25.
26. HEADINGS. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.
27. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
Texas.
28. EXECUTION. This instrument is executed and made on behalf of the
Trust by an officer of the Trust, not individually but solely as an officer, and
the obligations under this Agreement are
51
<PAGE> 29
not binding upon, nor shall resort be had to the private property of, any of the
Trustees, shareholders, officers, employees, or agents of the Trust personally,
but bind only the Trust property.
IN WITNESS WHEREOF, CONTINENTAL MORTGAGE AND EQUITY TRUST and BASIC
CAPITAL MANAGEMENT, INC., by their duly authorized officers, have signed these
presents all as of the day and year first above written.
CONTINENTAL MORTGAGE AND EQUITY TRUST
By: /s/ Randall M. Paulson
--------------------------------
Randall M. Paulson
President
BASIC CAPITAL MANAGEMENT, INC.
By: /s/ Thomas A. Holland
--------------------------------
Thomas A. Holland
Executive Vice President
and Chief Financial Officer
52
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,397
<SECURITIES> 13,571
<RECEIVABLES> 4,899
<ALLOWANCES> 1,456
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<PP&E> 318,102
<DEPRECIATION> 24,266
<TOTAL-ASSETS> 331,025
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<BONDS> 234,744
0
0
<COMMON> 0
<OTHER-SE> 87,315
<TOTAL-LIABILITY-AND-EQUITY> 331,025
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