<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, 1997
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, Texas 75231
- -------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
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(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 6, 1998, the Registrant had 4,021,447 shares of beneficial interest
outstanding. Of the total shares outstanding, 1,813,513 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $29,016,000
based on the last trade as reported on The Nasdaq Stock Market on March 6, 1998.
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
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INDEX TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page
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PART I
<S> <C>
Item 1. Business ................................................ 3
Item 2. Properties .............................................. 7
Item 3. Legal Proceedings ....................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ..... 25
PART II
Item 5. Market for Registrant's Shares of Beneficial
Interest and Related Shareholder Matters ............. 25
Item 6. Selected Financial Data ................................. 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 28
Item 8. Financial Statements and Supplementary Data ............. 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 74
PART III
Item 10. Trustees, Executive Officers and Advisor of the
Registrant ........................................... 74
Item 11. Executive Compensation ................................. 84
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................... 85
Item 13. Certain Relationships and Related Transactions ......... 86
PART IV
Item 14. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K .................... 90
Signature Page .................................................. 92
</TABLE>
2
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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. 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.
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 6, 1998, the Trust's advisor and its affiliates held shares
representing approximately 54.9% 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, 1997 consisted of 59
properties held for investment, seven properties held for sale, primarily
obtained through foreclosure, and one equity method real estate partnership
(owning two office buildings). Sixteen of the properties held for investment
were purchased in 1997. The Trust's mortgage notes receivable portfolio at
December 31, 1997 consisted of 11 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
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ITEM 1. BUSINESS (Continued)
Business Plan and Investment Policy (Continued)
The Trust's business is not seasonal. The Trust has determined to continue 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 selected instances, originate mortgage loans or it
may provide purchase money financing in conjunction with a property sale. The
Trust does intend to service and may either hold for investment or sell any or
all of 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 future 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 1998, 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. The Trust will also be an
opportunistic seller of properties in markets that have become over heated, i.e.
an abundance of buyers. Further, to obtain additional funds for investment and
to lock in current favorable interest rates, mortgage financing will be sought
on the Trust's unencumbered properties held for investment, consisting of an
apartment complex and two office buildings, 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.
The Trust's Board of Trustees currently intends to continue its policy of
prohibiting the Trust from incurring aggregate secured and unsecured
indebtedness in excess of 300% of the Trust's net asset value (defined as the
book value of all assets of the Trust minus all of its liabilities); however,
the Board of Trustees may alter such policy at any time.
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
4
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ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
investment and sales opportunities as well as financing and refinancing sources
for the Trust. The Advisor also serves as a consultant in connection with the
Trust's business plan and investment policy decisions made by the Trust's Board
of Trustees.
BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips served as a Trustee of the Trust until December 31, 1992.
Mr. Phillips also served as a director of BCM until December 22, 1989 and as
Chief Executive Officer of BCM until September 1, 1992. Mr. Phillips serves as a
representative of his children's trust which owns BCM and, in such capacity, has
substantial contact with the management of BCM and input with respect to its
performance of advisory services to the Trust. BCM is more fully described in
ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The
Advisor".
BCM has been providing advisory services to the Trust since March 28, 1989.
Renewal of BCM's advisory agreement with the Trust was approved at the annual
meeting of the Trust's shareholders held on May 8, 1997. 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 and SAMI. As of March 6, 1998 ART and BCM owned approximately
40.6% and 14.3%, respectively, of the Trust's outstanding shares of beneficial
interest and BCM and the Trust owned approximately 39.0% 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) First Equity Properties, Inc. ("First Equity"), which is
50% owned by BCM, (ii) Gene E. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of eighteen of the Trust's commercial properties to
Carmel Realty, Inc. ("Carmel Realty"), which is a company owned by First Equity.
Carmel Realty is entitled to receive property and construction management fees
and leasing commissions in accordance with the terms of
5
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ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
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 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 well as by
aggressive buyers attempting to penetrate or dominate a particular market.
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.
6
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ITEM 1. BUSINESS (Continued)
Competition (Continued)
To the extent that any particular investment opportunity is appropriate to more
than one of such entities, such investment opportunity will be allocated to the
entity which has had funds available for investment for the longest period of
time or, if appropriate, the investment may be shared among all or some of such
entities.
In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships", the Trust also competes with
other entities which are affiliates of the Advisor and which may have investment
objectives similar to the Trust's and that may compete with the Trust in
purchasing, selling, leasing and financing real estate and real estate related
investments. In resolving any potential conflicts of interest which may arise,
the Advisor has informed the Trust that it intends to continue to exercise its
best judgment as to what is fair and reasonable under the circumstances in
accordance with applicable law.
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to all the risks incident to ownership and financing of
real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks 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 or property type, 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, 1997, 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.
7
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ITEM 2. PROPERTIES (Continued)
The Trust's real estate portfolio consists of properties held for investment,
properties held for sale, which were primarily acquired through foreclosure of
the collateral securing mortgage notes receivable, and an investment in a
partnership. The Trust holds a fee simple title to all of the properties in its
real estate portfolio. The discussion set forth below under the heading "Real
Estate" provides certain summary information concerning the Trust's properties
held for investment, properties held for sale and its partnership investment.
The Trust's real estate is geographically diversified. At December 31, 1997, the
Trust held investments in apartments and/or commercial properties in each
geographic region of the continental United States. However, the Trust's
apartments and commercial properties are concentrated in the Southeast and
Southwest regions, as shown more specifically in the table under "Real Estate"
below. At December 31, 1997, 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, 1997, none of the Trust's properties, its partnership investment
or a mortgage note receivable exceeded 10% of the Trust's total assets. At
December 31, 1997, 84% of the Trust's assets consisted of properties held for
investment, 4% consisted of properties held for sale, less than 1% consisted of
an investment in a partnership and 1% consisted of mortgage notes and interest
receivable. The remaining 10% 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.]
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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 one commercial property in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
The Trust has 6 apartments and 9 commercial properties in this region.
Southwest region comprised of the states of Arizona, Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. The Trust has 21 apartments
and 11 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 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 2 apartments in this region.
Excluded from the above are nine parcels of unimproved land, as described below.
Real Estate
At December 31, 1997, 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, properties held for sale,
which were primarily obtained through foreclosure of the collateral securing
mortgage notes receivable, an investment in a partnership 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,
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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, 1997, the Trust did not have any properties on which
significant capital improvements were in process. However, in February 1998, the
Trust began construction of a 66,321 square foot industrial warehouse on its
5700 Tulane property.
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, 1997.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
-------- ---------- ----------
<S> <C> <C>
Northeast ................... --% 2.4%
Southeast ................... 18.6 39.1
Southwest ................... 59.4 50.4
Midwest ..................... 12.4 --
Mountain .................... 5.1 8.1
Pacific ..................... 4.5 --
----- -----
100.0% 100.0%
</TABLE>
The foregoing table is based solely on the number of apartment units and amount
of commercial square footage owned by the Trust and does not reflect the value
of the Trust's investment in each region. The Trust also owns nine parcels of
unimproved land, two parcels of 5 acres and 3.8 acres in the Southeast region
and seven parcels of 163 acres, 140 acres, 156 acres, 103 acres, 128 acres, 236
acres, and 4.9 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.
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
A summary of the activity in the Trust's owned real estate portfolio during 1997
is as follows:
<TABLE>
<S> <C>
Owned properties in real estate portfolio
at January 1, 1997 ................... 54
Properties purchased .................... 16
Properties sold ......................... (4)
-----
Owned properties in real estate portfolio
at December 31, 1997 ................. 66
=====
</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,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy %
Units/ -------------------------- --------------------------
Property Location Square Footage 1997 1996 1995 1997 1996 1995
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments
4242 Cedar Springs Dallas, TX 76 units/
60,600 sq. ft. $ .79 $ .75 $ .72 98 96 95
Applecreek Dallas, TX 216 units/
225,952 sq. ft. .53 .52 .50 92 90 90
Camelot Largo, FL 120 units/
141,024 sq. ft. .50 .48 .48 98 94 93
Country Crossing Tampa, FL 227 units/
199,952 sq. ft. .53 .51 .51 91 93 91
Cypresstree Houston, TX 168 units/
133,104 sq. ft. .57 * * 83 * *
Eagle Rock Los Angeles, CA 99 units/
68,614 sq. ft. .93 * * 92 * *
El Chapparal San Antonio, TX 190 units/
174,220 sq. ft. .64 .64 .63 95 89 92
Fairways Longview, TX 152 units/
134,176 sq. ft. .51 .51 .50 91 91 90
Forest Ridge Denton, TX 56 units/
65,480 sq. ft. .61 .59 .57 90 98 95
Fountain Lake Texas City, TX 166 units/
161,220 sq. ft. .53 .52 .52 95 90 90
Glenwood Addison, TX 168 units/
134,432 sq. ft. .70 .66 * 97 96 *
Grove Park Plano, TX 188 units/
143,556 sq. ft. .69 .65 * 93 95 *
Heritage on the Jacksonville, FL 301 units/
River 289,490 sq. ft. .60 .58 .55 92 92 94
In the Pines Gainesville, FL 242 units/
294,860 sq. ft. .50 .48 .48 97 92 98
Madison at Houston, TX 180 units/
Bear Creek 138,448 sq. ft. .58 * * 90 * *
McCallum Crossing Dallas, TX 322 units/
172,796 sq. ft. .88 .84 .81 96 98 98
McCallum Glen Dallas, TX 275 units/
159,850 sq. ft. .83 .80 .76 96 97 95
Oak Park IV Clute, TX 108 units/
78,708 sq. ft. .50 .49 .50 94 79 73
Oak Run Pasadena, TX 160 units/
128,016 sq. ft. .69 .68 * 92 96 *
Park at Colonnade San Antonio, TX 211 units/
188,000 sq. ft. .53 .52 * 91 96 *
Park Lane Dallas, TX 97 units/
87,260 sq. ft. .58 .55 .53 91 93 92
</TABLE>
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy %
Units/ -------------------------- --------------------------
Property Location Square Footage 1997 1996 1995 1997 1996 1995
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments - Continued
Parkwood Knoll San Bernardino, CA 178 units/
149,802 sq. ft. $ .65 $ .64 $ .62 96 95 98
Pierce Tower Denver, CO 57 units/
45,120 sq. ft. 1.01 .93 .91 97 97 97
Quail Oaks Balch Springs, TX 131 units/
72,848 sq. ft. .65 .63 .58 95 99 99
Somerset Texas City, TX 200 units/
163,368 sq. ft. .60 .59 .60 92 89 91
Stone Oak San Antonio, TX 252 units/
187,686 sq. ft. .60 .60 .58 92 88 93
Sunset Lake Waukegan, IL 414 units/
302,640 sq. ft. .80 .79 .76 90 88 95
Trails at Windfern Houston, TX 240 units/
173,376 sq. ft. .61 * * 95 * *
Willow Creek El Paso, TX 112 units/
103,140 sq. ft. .47 .47 .52 93 87 80
Willo-Wick Gardens Pensacola, FL 152 units/
153,360 sq. ft. .52 .51 .46 89 96 66
Willow Wick North Augusta, SC 104 units/
94,128 sq. ft. .50 .50 .47 98 93 99
Woodbridge Westminster, CO 194 units/
104,500 sq. ft. .88 .83 .82 96 97 97
Office Buildings
3400 Carlisle Dallas, TX 74,000 sq. ft. 13.42 10.50 * 95 98 *
Amoco New Orleans, LA 378,244 sq. ft. 12.25 9.93 * 66 33 *
Bay Plaza Tampa, FL 75,780 sq. ft. 12.30 * * 95 * *
Durham Centre Durham, NC 207,171 sq. ft. 15.33 * * 88 * *
Hampton Court Dallas, TX 104,001 sq. ft. 15.18 12.80 * 79 92 *
Jefferson Washington, DC 71,877 sq. ft. 27.71 * * 87 * *
NASA Office Park Clear Lake, TX 78,159 sq. ft. 10.27 10.46 10.00 76 64 55
Westgrove Air
Plaza Addison, TX 78,326 sq. ft. 7.33 * * 67 * *
Windsor Plaza Windcrest, TX 80,522 sq. ft. 13.32 11.38 10.22 58 84 87
Industrial Warehouses
4050 Getwell Memphis, TN 112,382 sq. ft. 2.18 1.92 2.06 100 37 67
5360 Tulane Atlanta, GA 30,000 sq. ft. 2.45 2.19 2.26 100 32 32
Brookfield Corporate
Center Chantilly, VA 63,504 sq. ft. 6.26 6.19 6.00 100 100 85
Central Storage Dallas, TX 216,035 sq. ft. 1.48 .99 * 100 100 *
Kelly Warehouses Dallas, TX 330,334 sq. ft. 2.96 2.43 2.20 95 93 88
McLeod Commerce
Center Orlando, FL 110,914 sq. ft. 6.69 6.38 6.09 96 80 83
Northgate
Distribution Marietta, GA 208,386 sq. ft. 4.02 3.91 3.82 100 100 89
Shady Trail Dallas, TX 42,900 sq. ft. 3.18 2.25 * 66 0 *
Space Center San Antonio, TX 101,500 sq. ft. 2.04 1.93 2.12 72 77 100
Sullyfield
Commerce Center Chantilly, VA 243,813 sq. ft. 5.96 5.23 5.17 96 90 84
Shopping Centers
Promenade Highland Ranch, CO 133,558 sq. ft. 9.56 9.35 * 96 80 *
Rio Pinar Orlando, FL 113,638 sq. ft. 8.54 8.33 8.26 91 88 89
</TABLE>
12
<PAGE> 13
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
<TABLE>
<CAPTION>
Property Location Acres
-------- -------- -----
<S> <C> <C>
Land
5700 Tulane Atlanta, GA 3.8 Acres
McKinney 140 McKinney, TX 140 Acres
OPUBCO Collin County, TX 156 Acres
Stacy Road Allen, TX 163 Acres
State Highway 121 Collin County, TX 236 Acres
Watters Road Collin County, TX 103 Acres
</TABLE>
* Property was purchased in 1997 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.
In January 1997, the Trust purchased the Madison at Bear Creek 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 9.6875% 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 $125,000 to Carmel Realty and a $35,000 acquisition fee
to BCM based on the $3.5 million purchase price of the property.
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 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 a variable rate, currently 8.5% per annum,
requires monthly payments of interest only 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 of the
property.
In March 1997, the Trust obtained mortgage financing in the amount of $4.0
million secured by the previously unencumbered AMOCO Office Building, in New
Orleans, Louisiana and by ten mortgage notes receivable, with a combined
principal balance, at the time, of $2.8 million. The Trust received net cash of
$3.8 million after payment of various closing costs associated with the
financing. The mortgage bears interest at 9.0% per annum, requires monthly
payments of principal and interest of $35,989 and matures in March 1999. The
Trust may borrow up to an additional $2.5 million for completion of tenant
improvements or upon reaching certain income and occupancy levels of the
property. The
13
<PAGE> 14
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Trust paid BCM a mortgage brokerage and equity refinancing fee of $40,000 based
on the $4.0 million mortgage. As discussed below, under "Mortgage Loans," three
of the mortgage notes receivable pledged as additional collateral on the AMOCO
mortgage, with a combined principal balance of $1.3 million, were paid in full
in June, August and November 1997. Such payments were remitted to the lender as
a paydown of the AMOCO mortgage. As discussed below, in March 1998, the loan was
refinanced and the collateral mortgage notes receivable were released.
In April 1997, the Trust purchased the OPUBCO land, 156 acres of undeveloped
land in Collin County, Texas, for $3.0 million. In conjunction with the
purchase, the Trust obtained mortgage financing secured by the land and by two
other parcels of land in the amount of $4.2 million. The Trust received net cash
of $1.2 million. The mortgage bears interest at 9.5% per annum, requires monthly
payments of interest only and matures in April 2000. The Trust paid a real
estate brokerage commission of $109,000 to Carmel Realty and an acquisition fee
of $30,000 to BCM based on the $3.0 million purchase price of the land.
Also in April 1997, the Trust refinanced the mortgage debt secured by the
Willo-Wick Apartments in Pensacola, Florida in the amount of $3.3 million. The
Trust received net cash of $311,000 after the payoff of $2.8 million in existing
mortgage debt and the payment of various closing costs associated with the
financing. The new mortgage bears interest at 9.13% per annum, requires monthly
payments of principal and interest of $27,988 and matures in May 2007. The Trust
paid BCM a mortgage brokerage and equity refinancing fee of $33,000 based on the
new $3.3 million mortgage.
In May 1997, the Trust purchased the Trails at Windfern, a 240 unit apartment
complex in Houston, Texas, for $4.2 million. The Trust paid $769,000 in cash,
assumed the existing mortgage of $3.2 million with the seller providing purchase
money financing of an additional $150,000. The $3.2 million mortgage bears
interest at a variable rate, currently 9.0% per annum, adjusted annually,
requires monthly payments of principal and interest of $26,674 and matures in
January 1999. The $150,000 purchase money financing bears interest at 8.0% per
annum, requires monthly payments of interest only and matures in May 2000. The
Trust paid a real estate brokerage commission of $144,000 to Carmel Realty and
an acquisition fee of $42,000 to BCM based on the $4.2 million purchase price of
the property.
Also in May 1997, the Trust modified and extended the mortgage secured by the
Rio Pinar Shopping Center in Orlando, Florida. In conjunction with the
modification, the Trust made a principal reduction payment of $500,000. The
modified and extended mortgage bears interest at 9.0% per annum, requires
monthly payments of principal and interest of $49,465 and has an extended
maturity of March 1999. $1.0 million of the mortgage is recourse to the Trust.
In June 1997, the Trust purchased Bay Plaza, a 75,780 square foot office
building in Tampa, Florida, for $4.3 million. The Trust paid $1.2
14
<PAGE> 15
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
million in cash, assumed the existing mortgage of $2.1 million with the seller
providing purchase money financing of an additional $1.0 million. The $2.1
million mortgage bears interest at 8.3% per annum, requires monthly payments of
principal and interest of $23,354 and matures in June 2009. The $1.0 million
purchase money financing bears interest at 8.3% per annum, requires monthly
payments of principal and interest of $9,731 and matures in June 2002. The Trust
paid a real estate brokerage commission of $148,000 to Carmel Realty and an
acquisition fee of $43,000 to BCM based on the $4.3 million purchase price of
the property.
Also in June 1997, the Trust purchased the Stacy Road land, 163 acres of
undeveloped land in Allen, Texas, for $2.5 million. The Trust paid $800,000 in
cash and obtained new mortgage financing of $1.7 million. The mortgage bears
interest at 9.5% per annum, requires monthly payments of interest only and
matures in April 2000. The Trust paid a real estate brokerage commission of
$96,000 to Carmel Realty and an acquisition fee of $25,000 to BCM based on the
$2.5 million purchase price of the land.
Further in June 1997, the Trust refinanced the mortgage debt secured by the
Northgate Distribution Center in Marietta, Georgia in the amount of $4.7
million. The Trust received net cash of $1.4 million after the payoff of $3.0
million in existing mortgage debt, the funding of escrows and the payment of
various closing costs associated with the financing. The new mortgage bears
interest at 8.82% per annum, requires monthly payments of principal and interest
of $38,947 and matures in July 2007. The Trust paid BCM a mortgage brokerage and
equity financing fee of $47,000 based on the new $4.7 million mortgage.
Further in June 1997, the Trust refinanced the mortgage debt secured by the
Edgewood Apartments in Lansing, Illinois in the amount of $9.4 million. The
Trust received net cash of $858,000 after the payoff of $8.0 million in existing
mortgage debt, the funding of escrows and the payment of various closing costs
associated with the financing. The new mortgage bears interest at 7.96% per
annum, requires monthly payments of principal and interest of $68,529 and
matures in July 2007. The Trust paid BCM a mortgage brokerage and equity
refinancing fee of $94,000 based on the new $9.4 million mortgage.
In July 1997, the Trust purchased Durham Centre, a 207,171 square foot office
building in Durham, North Carolina, for $20.5 million. The Trust paid $5.7
million in cash and obtained new mortgage financing of $14.8 million. The
mortgage bears interest at 9.8% per annum, requires monthly payments of
principal and interest of $132,407 and matures in July 2000. The Trust paid a
real estate brokerage commission of $428,000 to Carmel Realty and a $205,000
acquisition fee to BCM based on the $20.5 million purchase price of the
property. The loan is recourse to the Trust.
Also in July 1997, the Trust refinanced the mortgage debt secured by the
Heritage on the River Apartments in Jacksonville, Florida in the amount of $8.0
million. The Trust received net cash of $1.0 million after the
15
<PAGE> 16
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
payoff of $6.5 million in existing mortgage debt, the funding of escrows and the
payment of various closing costs associated with the financing. The new mortgage
bears interest at 8.125% per annum, requires monthly payments of principal and
interest of $59,400 and matures in August 2007. The Trust paid BCM a mortgage
brokerage and equity refinancing fee of $80,000 based on the new $8.0 million
mortgage.
In August 1997, the Trust purchased the McKinney 140 land, 140 acres of
undeveloped land in McKinney, Texas, for $2.6 million. The Trust paid $898,000
in cash and obtained new mortgage financing of $1.7 million. The mortgage bears
interest at 9.5% per annum, requires monthly payments of interest only and
matures in April 2000. The Trust paid a real estate brokerage commission of
$98,000 to Carmel Realty and a $26,000 acquisition fee to BCM based on the $2.6
million purchase price of the property.
Also in August 1997, the Trust purchased the Eagle Rock Apartments, a 99 unit
apartment complex in Los Angeles, California, for $4.4 million. The Trust paid
$1.1 million in cash with the seller providing purchase money financing of $3.3
million. The purchase money financing bears interest at 10.5% per annum,
requires monthly payments of interest only and matures in August 1998. The Trust
paid a real estate brokerage commission of $51,000 to Carmel Realty and an
acquisition fee of $44,000 to BCM based on the $4.4 million purchase price of
the property.
In October 1997, the Trust purchased the Westgrove Air Plaza, a 78,326 square
foot combination aircraft hangar and office building in Addison, Texas, for $2.4
million. The Trust paid $1.2 million in cash with the seller providing $1.2
million of purchase money financing. The purchase money financing bears interest
at a variable rate, currently 10.5% per annum, requires monthly payments of
interest only and matures in April 1998. The Trust paid a real estate brokerage
commission of $91,000 to Carmel Realty and a $24,000 acquisition fee to BCM
based on the $2.4 million purchase price of the property.
Also in October 1997, the Trust purchased the Cypresstree Apartments, a 168 unit
apartment complex in Houston, Texas, for $3.2 million. The Trust paid $550,000
in cash with the seller providing $2.6 million of purchase money financing. The
purchase money financing bears interest at 10.0% per annum, requires monthly
payments of interest only and matures in December 1998. The Trust paid a real
estate brokerage commission of $114,500 to Carmel Realty and a $32,000
acquisition fee to BCM based on the $3.2 million purchase price of the property.
The Trust and National Income Realty Trust ("NIRT") were, until October 1997,
the partners in a joint venture partnership in which the Trust had a 60%
partnership interest. At December 31, 1996, the partnership owned 5 industrial
warehouses. In August 1997, the partnership sold one of the industrial
warehouses for $60,000 in cash, of which the Trust's equity share was $36,000.
The partnership recognized a loss of $82,000 on the sale, of which the Trust's
equity share was $49,000.
16
<PAGE> 17
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In October 1997, the Trust purchased NIRT's 40% interest in the partnership for
$1.6 million in cash. In conjunction with the purchase, the Trust obtained
mortgage financing of $1.8 million secured by three previously unencumbered
partnership properties. The Trust received net cash of $45,000 after the payment
of various closing costs associated with the purchase and financing. The
mortgage bears interest at a variable rate, currently 9.5% per annum, requires
monthly payments of principal and interest of $16,295 and matures in October
1998.
In December 1997, the Trust refinanced the mortgage debt secured by the Grove
Park Apartments in Plano, Texas in the amount of $4.8 million. The Trust
received net cash of $1.3 million after the payoff of $3.2 million in existing
mortgage debt, the funding of escrows and the payment of various closing costs
associated with the financing. The new mortgage bears interest at 7.32% per
annum, requires monthly payments of principal and interest of $32,600 and
matures in January 2008. The Trust paid BCM a mortgage brokerage and equity
refinancing fee of $48,000 based on the new $4.8 million mortgage.
Also in December 1997, the Trust refinanced the mortgage debt secured by the
Park at Colonnade Apartments in San Antonio, Texas in the amount of $4.2
million. The Trust received net cash of $502,000 after the payoff of $3.5
million in existing mortgage debt, the funding of escrows and the payment of
various closing costs associated with the financing. The new mortgage bears
interest at 7.32% per annum, requires monthly payments of principal and interest
of $28,900 and matures in January 2008. The Trust paid BCM a mortgage brokerage
and equity refinancing fee of $42,000 based on the new $4.2 million mortgage.
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 the payoff of $5.4 million in
existing mortgage debt, the funding of escrows and the payment of various
closing costs associated with the financing. 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 BCM a mortgage brokerage and equity
refinancing fee of $77,000 based on the new $7.7 million mortgage.
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
$21,000 acquisition fee to BCM based on the $2.1 million purchase price of the
property.
In March 1998, the Trust purchased 1010 Common Street, a 494,579 square foot
office building in New Orleans, Louisiana, for $14.5 million. The Trust paid
$9.0 million in cash and obtained new mortgage financing of $12.0 million,
inclusive of a $3.8 million tenant improvement escrow holdback. The mortgage
bears interest at 9.7% per annum, requires monthly payments of interest only and
matures in March 2001. The Trust
17
<PAGE> 18
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
paid a real estate brokerage commission of $337,500 to Carmel Realty and an
acquisition fee of $145,000 to BCM based on the $14.5 million purchase price of
the property.
Also in March 1998, the Trust purchased 225 Baronne Street, a 416,834 square
foot office building in New Orleans, Louisiana, for $11.2 million. The Trust
paid $2.2 million in cash and obtained new mortgage financing of $9.0 million,
inclusive of a $1.6 million tenant improvement escrow holdback. The mortgage
bears interest at 9.7% per annum, requires monthly payments of interest only and
matures in March 2001. The Trust paid a real estate brokerage commission of
$288,000 to Carmel Realty and an acquisition fee of $112,000 to BCM based on the
$11.2 million purchase price of the property.
Further in March 1998, the Trust refinanced the mortgage debt secured by the
AMOCO Building in New Orleans, Louisiana, and by seven mortgage notes receivable
in the amount of $16.0 million. The Trust received net cash of $11.9 million
after the payoff of $3.8 million in existing mortgage debt, the payment of
various closing costs associated with the financing and the funding of a $1.0
million tenant improvement escrow. The new mortgage bears interest at 8.7% per
annum, requires monthly payments of interest only and matures in March 2001. The
Trust paid BCM a mortgage brokerage and equity refinancing fee of $160,000 based
on the new $16.0 million mortgage.
The mortgage debt secured by the above three New Orleans properties is
cross-collateralized. Both BCM and CMET have guaranteed the monthly interest
payments. The lender has committed to lend CMET an additional $163.0 million
during the next twenty-four months. In exchange for this commitment, the lender
may record a second lien mortgage on the New Orleans properties 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 CMET or BCM affiliated entities, with
the remaining $1.0 million released pro rata as the remaining $100.0 million in
new loans are funded.
Properties Held for Sale. Set forth below are the Trust's properties held for
sale, which were primarily 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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Rent Per
Units/ Square Foot Occupancy %
Square ----------------------------- -----------------------
Property Location Footage 1997 1996 1995 1997 1996 1995
- --------------- --------------- --------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments
- ----------
Edgewood Lansing, IL 353 units/
320,638 sq. ft $ .74 $ .72 $ .71 92 91 94
Shadowridge Rocksprings, WY 64 units/
52,700 sq. ft .54 .57 .59 99 87 92
Office Building
- ---------------
Pinemont Houston, TX 19,685 sq. ft. 9.51 9.36 9.82 40 69 80
</TABLE>
18
<PAGE> 19
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy %
Square Footage/ ----------------------------- -----------------------
Property Location Acres 1997 1996 1995 1997 1996 1995
- -------------------- -------------- --------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Industrial Warehouse
- --------------------
Ogden Industrial Ogden, UT 107,112 sq. ft. 3.56 2.80 2.76 100 100 100
Land
- ----
Del Ray Forum Delray Beach, FL 5 acres
Northwest
Crossings Houston, TX 4.9 acres
Round Mountain Austin, TX 128 acres
</TABLE>
In April 1997, the Trust sold Tollhill West, a 159,546 square foot office
building in Dallas, Texas, for $14.8 million in cash. The Trust received net
cash of $9.0 million after the payoff of $5.0 million in existing mortgage debt
and the payment of various closing costs associated with the sale. The Trust
paid Carmel Realty a real estate brokerage commission of $244,000 based on the
$14.8 million sales price of the property. The Trust recognized a gain on the
sale of $5.4 million.
In May 1997, the Trust sold 2626 Cole, a 119,632 square foot office building in
Dallas, Texas, for $11.0 million in cash. The Trust received net cash of $4.2
million after the payoff of $6.5 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Trust paid Carmel
Realty a real estate brokerage commission of $280,000 based on the $11.0 million
sales price of the property. The Trust recognized a gain on the sale of $1.4
million.
In August 1997, the Trust sold Builders Square, a 115,492 square foot shopping
center in St. Paul, Minnesota, for $2.4 million in cash. The Trust received net
cash of $1.5 million after the payoff of $873,000 in existing mortgage debt and
the payment of various closing costs associated with the sale. The Trust paid a
real estate brokerage commission of $92,000 to Carmel Realty based on the $2.4
million sales price of the property. The Trust recognized a loss of $245,000 on
the sale.
In October 1997, the Trust sold Northpoint Central, a 176,043 square foot office
building in Houston, Texas, for $11.0 million in cash. The Trust received net
cash of $4.7 million after the payoff of $5.8 million in existing mortgage debt
and the payment of various closing costs associated with the sale. The Trust
paid a real estate brokerage commission of $285,000 to Carmel Realty based on
the $11.0 million sales price of the property. The Trust recognized a gain on
the sale of $1.4 million.
In December 1997, the Trust sold .2 acres of the parcel of Northwest
Crossing land in Houston, Texas, for $72,000 in cash. The Trust
recognized no gain or loss on the sale.
19
<PAGE> 20
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
At December 31, 1997, the Edgewood Apartments, a 353 unit apartment complex in
Lansing, Illinois, was under contract for sale. In January 1998, the Trust
completed the sale for $12.1 million in cash. The Trust received net cash of
$2.3 million after the payoff of $9.3 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Trust paid a real
estate brokerage commission of $302,000 to Carmel Realty based on the $12.1
million sales price of the property. The Trust will recognize a gain of
approximately $5.0 million on the sale.
The 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.
Partnership Properties. The Trust, in partnership with 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. Set forth below are the
properties owned by SAC 9 and the average annual rental rate and occupancy
thereof at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy %
----------------------------- -----------------------
Property Location Square Footage 1997 1996 1995 1997 1996 1995
- ----------------- ------------------ --------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prospect Park #29 Rancho Cordova, CA 40,807 sq. ft. $16.97 $11.06 $12.30 100 100 100
U.S. Sprint Rancho Cordova, CA 62,957 sq. ft. 10.68 10.56 10.52 100 100 100
</TABLE>
Mortgage Loans
In addition to real estate, a portion of the Trust's assets are invested in
mortgage notes receivable, principally secured by income-producing real estate.
The Trust expects that the percentage of its assets invested in mortgage loans
will continue to decrease, as it is not actively seeking to fund or acquire
mortgage loans. It may, however, in selected instances, originate mortgage loans
or it may provide purchase money financing in conjunction with a property sale.
The Trust intends to service and may either hold for investment or sell any or
all of 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
20
<PAGE> 21
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
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, 1997, consisted of office
buildings, apartments, a building housing a health club, 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, 1997, the Trust's mortgage notes receivable portfolio included
six mortgage loans with an aggregate outstanding balance of $5.0 million secured
by income-producing real estate located in the Southeast, and five mortgage
loans with an aggregate outstanding balance of $332,000 secured by single-family
residences located in the Southwest region. At December 31, 1997, 1% 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, 1997. The table does not include the
mortgage notes secured by single-family residences discussed in the preceding
paragraph. 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 ................... 11.1% 47.6% 58.7%
Southwest ................... -- 36.4 36.4
Midwest ..................... 4.9 -- 4.9
----- ----- -----
16.0% 84.0% 100.0%
</TABLE>
A summary of the activity in the Trust's mortgage notes receivable portfolio
during 1997 is as follows:
<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio
at January 1, 1997 ................................ 16
Loans paid in full .................................. (5)
--
Loans in mortgage notes receivable portfolio
at December 31, 1997 .............................. 11
==
</TABLE>
21
<PAGE> 22
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
First Mortgage Loans. The Trust has invested in first mortgage notes, with
either short, medium or long-term maturities. First mortgage loans generally
provide for level periodic payments of principal and interest sufficient to
substantially repay the loan prior to maturity, but may involve interest-only
payments or moderate amortization of principal and a "balloon" principal payment
at maturity. With respect to first mortgage loans, 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 1997.
At December 31, 1997, one of the Trust's mortgage notes receivable with a
principal balance of $700,000 was in default. The note matured in July 1993. The
Trust continues to receive partial interest payments monthly on the note from
the borrower. The Trust is evaluating its options with respect to foreclosure of
the collateral property and the Trust does not anticipate incurring a loss
beyond the established reserve.
One of the Trust's mortgage notes receivable with a principal balance of $1.4
million, matured in November 1995. In February 1997, the Trust received a
payment of $470,000 from the borrower, $305,000 being applied against accrued
but unpaid interest and $165,000 being applied to reduce the principal balance
of the note. In September 1997, the Trust received $1.4 million in full payment
of principal and all accrued but unpaid interest.
As discussed above in "Real Estate," ten of the Company's mortgage notes
receivable, with a combined principal balance, at the time, of $2.8 million were
pledged as additional collateral on a $4.0 million loan, primarily secured by
the AMOCO Building. In June, August and November 1997, three of the mortgage
notes receivable, with a combined principal balance of $1.3 million, were paid
in full. Such payments were remitted to the lender as a paydown of the mortgage
debt. In March 1998, the AMOCO loan was refinanced and the collateral loans
were released.
In June 1997, the Trust obtained financing in the amount of $1.4 million secured
by the mortgage note receivable secured by the Cypress Creek Office Building in
Fort Lauderdale, Florida. The financing bears interest at a variable rate,
currently 9.0% per annum, requires monthly principal and interest payments of
$14,126 and matures in June 2009. The Trust paid a mortgage brokerage and equity
refinancing fee of $14,000 to BCM based on the $1.4 million financing.
22
<PAGE> 23
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
Wraparound Mortgage Loans. The Trust has invested in wraparound mortgage loans,
sometimes called all-inclusive loans, made on real estate subject to prior
mortgage indebtedness. A wraparound mortgage loan is a mortgage loan having an
original principal amount equal to the outstanding balance under the prior
existing mortgage loan(s) plus the amount actually advanced under the wraparound
mortgage loan.
Wraparound mortgage loans may provide for full, partial or no amortization of
principal. The Trust's policy is to make wraparound mortgage loans in amounts
and on properties as to which it would otherwise make first mortgage loans. At
December 31, 1997, the Trust's mortgage notes receivable portfolio contained no
wraparound mortgage loans.
Junior Mortgage Loans. The Trust has invested in junior mortgage loans. Such
loans are secured by mortgages that are subordinate to one or more prior liens
either on the fee or a leasehold interest in real estate. Recourse on such loans
ordinarily includes the real estate on which the loan is made, other collateral
and personal guarantees by the borrower. The Trust's Declaration of Trust
restricts investment in junior mortgage loans, excluding wraparound mortgage
loans, to not more than 10% of the Trust's assets. At December 31, 1997, less
than 1% of the Trust's assets were invested in junior mortgage loans.
Other. In July 1996, the Trust agreed to fund up to $500,000 on a promissory
note secured by a contract to purchase land in Frisco, Texas. At December 31,
1996, the Trust had funded the entire $500,000. The note bore interest at 13%
per annum and all accrued interest and principal were due at the note's December
31, 1996 maturity date. The note's maturity date was subsequently extended. The
note and all accrued but unpaid interest was paid in full in June 1997.
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 6, 1998, ART
owned approximately 40.6% of the Trust's outstanding shares of beneficial
interest. At December 31, 1997, the Trust owned 818,088 shares of ART's common
stock, approximately 6.1% of ART's common shares outstanding, which the Trust
purchased in open market transactions in 1990 and 1991, at a total cost to the
Trust of $1.6 million. The ART common stock owned by the Trust is considered to
be available for sale and accordingly, is carried at fair value defined as the
period end closing market value. At December 31, 1997, the market value of the
ART common stock was $11.8 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 common stock of TCI through
23
<PAGE> 24
ITEM 2. PROPERTIES (Continued)
Equity Investments in Real Estate Entities (Continued)
negotiated or open market transactions. The Trustees of the Trust serve as
directors of TCI and the officers of the Trust also serve as officers of TCI.
BCM, the Trust's advisor, also serves as advisor to TCI. At December 31, 1997,
the Trust owned 79,500 shares of TCI's common stock, approximately 2.0% of TCI's
common shares outstanding, which the Trust purchased in open market transactions
in 1990 and 1991 at a total cost of to the Trust of $235,000. The Trust's
investment in TCI is considered to be available for sale and is carried at fair
value. At December 31, 1997, the market value of the Trust's investment in TCI's
common shares was $1.3 million.
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
States 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 "Olive Modification") that settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and 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 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 intended to assert that certain actions taken by the Trust's
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.
24
<PAGE> 25
ITEM 3. LEGAL PROCEEDINGS (Continued)
Olive Litigation (Continued)
The Olive Amendment provides for the addition of four 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 Olive 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 shareholder meetings of the Trust
held until April 28, 1999 in favor of all new members of the Trust's Board of
Trustees added under the Olive Amendment. The Olive Amendment also requires
that, until April 28, 1999, all shares of the Trust owned by Mr. 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
--------------------------
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED
SHAREHOLDER MATTERS
The Trust's shares of beneficial interest are traded on The Nasdaq Stock Market
("Nasdaq") using the symbol "CMETs". The following table sets forth the high and
low prices as reported by the Nasdaq.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------- --------- ---------
<S> <C> <C>
March 31, 1998
(through March 6, 1998)....................... $ 16 3/4 $ 15 1/2
March 31, 1997................................. 15 1/2 11
June 30, 1997.................................. 16 1/4 11
September 30, 1997............................. 21 1/4 11 1/2
December 31, 1997.............................. 21 1/2 15 1/2
</TABLE>
25
<PAGE> 26
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED
SHAREHOLDER MATTERS (Continued)
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------- ---------- ----------
<S> <C> <C>
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
</TABLE>
As of March 6, 1998, the closing price of the Trust's shares of beneficial
interest on the Nasdaq was $16.00 per share.
As of March 6, 1998, the Trust's shares of beneficial interest were held by
4,873 holders of record.
The Trust paid distributions in 1997 and 1996 as follows:
<TABLE>
<CAPTION>
Amount
Date Declared Record Date Payable Date Per Share
- ----------------- ----------------- ------------------ ---------
<S> <C> <C>
February 26, 1997 March 14, 1997 March 31, 1997 $ .13
June 5, 1997 June 13, 1997 June 30, 1997 .13
September 3, 1997 September 15, 1997 September 30, 1997 .13
December 1, 1997 December 15, 1997 December 31, 1997 .13
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
</TABLE>
- -------------------
* Special dividend.
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1997 and in 1996 represented capital gains.
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,
1997, the Trust had repurchased 1,450,129 of its shares at a total cost to the
Trust of $7.7 million. In 1997, the Trust repurchased 4,500 of its shares.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
26
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenues ........................ $ 56,475 $ 45,363 $ 38,309 $ 29,741 $ 24,288
Expenses ........................ 60,647 47,799 39,982 31,803 23,460
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations ................... (4,172) (2,436) (1,673) (2,062) 828
Equity in income (loss)
of partnerships .............. 99 228 230 98 (213)
Gain on sale of real
estate and marketable
equity securities ............ 8,249 10,122 -- 1,131 --
Extraordinary gain .............. -- 812 -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ............... $ 4,176 $ 8,726 $ (1,443) $ (833) $ 615
=========== =========== =========== =========== ===========
EARNINGS PER SHARE DATA
Income (loss) before
extraordinary gain ........... $ 1.04 $ 1.89 $ (.33) $ (.19) $ .13
Extraordinary gain .............. -- .19 -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ............... $ 1.04 $ 2.08 $ (.33) $ (.19) $ .13
=========== =========== =========== =========== ===========
Distributions per share ......... $ .52 $ .89 $ .40 $ .40 $ .33
Weighted average
shares outstanding ........... 4,025,794 4,199,147 4,377,165 4,379,722 4,521,384
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable, net .............. $ 3,629 $ 7,074 $ 5,351 $ 7,117 $ 32,129
Real estate held for
sale, net
Foreclosed ................... 5,670 5,738 6,436 19,533 10,486
Other ........................ 5,940 -- 1,268 -- --
Real estate held for
investment, net .............. 250,084 214,460 174,713 124,706 94,440
Investment in partnerships ...... 144 2,293 12,970 13,805 14,079
Total assets .................... 299,370 250,010 218,568 182,839 160,462
Notes and interest
payable ...................... 199,712 160,554 135,590 98,252 74,786
Shareholders' equity ............ 88,043 79,183 75,985 78,767 81,139
Book value per share ............ $ 21.89 $ 19.67 $ 17.36 $ 17.99 $ 18.53
</TABLE>
27
<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA (Continued)
The Trust purchased sixteen properties in 1997 for a total of $66.9 million,
thirteen properties in 1996 for a total of $67.5 million, seven properties in
1995 for a total of $38.9 million, eight properties in 1994 for a total of $32.7
million and five properties in 1993 for a total of $16.9 million. The Trust sold
four properties in 1997 for a total of $39.2 million, 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 $3.1 million at December 31, 1997 compared
with $3.0 million at December 31, 1996. The principal reasons for this increase
in cash are discussed in the paragraphs below.
The Trust's principal sources of cash have been and will continue to be from
property operations, proceeds from property sales, principal payments on
mortgage notes receivable and borrowings. The Trust expects that net cash
provided by operating activities and from anticipated external sources, such as
property sales, financings and refinancings, will be sufficient to meet the
Trust's various cash needs in 1998, 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 to $23.7 million in 1997. This increase is primarily
attributable to cash flow received from 12 income-producing properties purchased
in 1996 and 11 income-producing properties purchased in 1997 and to increased
occupancy and rental rates at the Trust's apartments and commercial properties
and the Trust's control of operating expenses primarily at its apartments. These
increases are partially offset by decreases of $154,000 due to the sale of four
properties in 1997 and $1.5 million due to the sale of five properties and the
loss of a property to foreclosure in 1996. The Trust's management believes that
this trend of increasing cash flow from property operations will continue as it
benefits from the properties purchased in 1997, and if the economy remains
stable or improves.
28
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Interest collected on mortgage notes receivable changed from $588,000 in 1995 to
$575,000 in 1996 to $849,000 in 1997. The decrease in 1996 is primarily due to a
loan which became nonaccruing in 1996. The increase in 1997 is primarily due to
the receipt of unpaid interest on the collection of a matured note receivable.
Miscellaneous interest income increased from $466,000 in 1996 to $618,000 in
1997 due to an increase in short-term investments. 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 the Trust providing purchase money financing in connection
with a property sale.
Interest paid on the Trust's notes payable increased from $8.9 million in 1995
to $11.3 million in 1996 to $16.2 million in 1997. These increases are primarily
attributable to interest paid on mortgages secured by ten properties purchased
encumbered by debt in 1996 and eleven properties purchased encumbered by debt in
1997; three borrowings in 1996 and two borrowings in 1997 secured by mortgages
on previously encumbered properties and eleven mortgage notes receivable; and
interest paid on new notes resulting from the refinancing of seven properties in
1996 and seven properties in 1997. The Trust believes that interest paid on
notes payable will continue to increase as the Trust continues to purchase
properties on a leveraged basis and obtain financing on its remaining
unencumbered income-producing properties.
The Trust was involved in significant investing activities during 1997. The
Trust purchased four apartment complexes, four commercial properties, three
industrial warehouses and five parcels of undeveloped land during 1997, for
which the Trust paid a total of $70.1 million. The Trust paid $20.6 million in
cash, with the remaining $49.5 million being financed through new or assumed
mortgage debt. The Trust also made improvements to its properties totaling $5.0
million. The Trust sold four commercial properties during 1997 for $37.1
million. The Trust received $18.9 million in net cash after the payoff of
existing mortgage debt and the payment of various closing costs associated with
the sales. In addition, the Trust collected $3.4 million on its mortgage notes
receivable, primarily from the payoff of four notes totaling $2.8 million, with
the remainder being collected from scheduled paydowns on the Trust's other
mortgage notes receivable.
During 1997, the Trust received net financing proceeds of $5.2 million from
mortgage financing secured by a previously unencumbered office building and
eleven mortgage notes receivable. In addition, the Trust refinanced the
mortgages secured by five apartment complexes and two commercial properties
receiving a total of $7.5 million in net cash proceeds after the payoff of $32.4
million in existing mortgage debt and the payment of various closing costs
associated with the financings. Also during 1997, the Trust made scheduled
mortgage principal payments totaling $2.4 million.
The Trust has paid quarterly distributions since the first quarter of 1993. In
1996, the Trust paid regular and special distributions to its
29
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
shareholders of $.89 per share or a total of $3.8 million. In 1997, the Trust
paid regular distributions to its shareholders of $.52 per share or a total of
$2.1 million.
During the first quarter of 1998, the Trust has continued to be an active
investor. The Trust has purchased two office buildings and a parcel of
unimproved land, for a total of $27.8 million, the Trust paying $12.5 million in
cash with the remainder of the purchase prices financed through mortgage debt.
The Trust derived the cash for these acquisitions from its cash on hand at
December 31, 1997, the sale of an apartment complex and the refinancing of a
shopping center and an office building.
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,
1997, the Trust had repurchased 1,450,129 of its shares at a total cost to the
Trust of $7.8 million. In 1997, the Trust repurchased 4,500 of its shares.
The Trust's 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 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
1997 COMPARED TO 1996. For the year 1997, the Trust had net income of $4.2
million, as compared to net income of $8.7 million for the year 1996. The
Trust's 1997 net income includes gains on sale of real estate of $8.2 million
and it'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 primary factors contributing to the decrease in the Trust's net
income are discussed in the following paragraphs.
Rents increased from $44.2 million in 1996 to $55.2 million in 1997. Of this
increase, $8.3 million is due to the acquisition of four apartment
30
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
complexes and eight commercial properties in 1996 and $6.0 million is due to the
acquisition of four apartment complexes and seven commercial properties in 1997.
An additional increase of $1.7 million is attributable to generally higher rents
and occupancy at the Trust's apartment complexes and commercial properties.
These increases are offset in part by a decrease of $3.8 million due to the sale
of five apartment complexes in 1996 and four commercial properties in 1997 and a
decrease of $1.4 million due to the loss of a commercial property to foreclosure
in 1996. Rents are expected to increase in 1998 due to a full year of operations
for properties acquired in 1997.
Interest income increased from $1.1 million in 1996 to $1.3 million in 1997.
This increase is due to the receipt of unpaid interest on the collection of a
matured mortgage note receivable. Interest income is expected to decrease in
1998 due to note maturities, payoffs and notes placed on non-accrual status
during 1997. See NOTE 2. "NOTES AND INTEREST RECEIVABLE."
Property operating expenses increased from $26.7 million in 1996 to $32.0
million in 1997. An increase of $5.2 million is due to the acquisition of four
apartment complexes and eight commercial properties during 1996 and an
additional $3.1 million is due to the acquisition of four apartment complexes
and seven commercial properties in 1997. The remainder of the increase is
primarily due to increased repair and maintenance and personnel expenses
incurred in an effort to maintain and increase the Trust's rental and occupancy
rates. These increases are partially offset by a decrease of $2.3 million due to
the sale of five apartment complexes in 1996 and four commercial properties in
1997 and a decrease of $808,000 is due to the loss of a property to foreclosure
in 1996. Property operating expenses are expected to increase in 1998 due to a
full year of operations of the properties acquired in 1997.
Interest expense increased from $12.8 million in 1996 to $17.1 million in 1997.
Of this increase, $4.5 million is due to interest expense recognized on
mortgages secured by properties acquired in 1996 and 1997. An additional
$825,000 is due to interest expense on six borrowings in 1996 and 1997, secured
by mortgages on previously unencumbered apartment complexes, an office building
and eleven notes receivable and refinancing of seven existing mortgages. These
increases are partially offset by a decrease of $978,000 due to the sale of
three apartment complexes encumbered by debt in 1996 and four commercial
properties encumbered by debt in 1997 and a decrease of $495,000 due to the loss
of a property to foreclosure in 1996. Interest expense is expected to increase
in 1998, as a result of a full year of interest expense on properties acquired
or refinanced in 1997.
Depreciation expense increased from $4.8 million in 1996 to $6.2 million in
1997. This increase is due to the acquisition of four apartment complexes and
eight commercial properties in 1996 and four apartment complexes and seven
commercial properties in 1997, partially offset by the sale of four commercial
properties in 1997 and five apartment
31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
complexes in 1996. Depreciation is expected to increase in 1998, as a result of
a full year of depreciation on the properties acquired in 1997.
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 increased from $1.1 million in 1996 to $1.5 million in
1997, due to the increase in the Trust's gross assets, the basis for such fee.
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 is to require the
Trust's advisor refund $606,000 of the annual advisory fee for 1997 and $589,000
of the annual advisory fee for 1996. Such fee is expected to continue to
increase as the Trust's assets increase. See NOTE 9. "ADVISORY AGREEMENT."
Net income and incentive sales fees of $1.0 million were earned by the Trust's
advisor in 1996 and 1997. Such fees are the result of the Trust recognizing
gains totaling $9.4 million from the sale of three apartment complexes in 1996
and gains totaling $8.2 million on the sale of four commercial properties in
1997.
General and administrative expenses increased from $2.2 million in 1996 to $2.7
million in 1997. Of this increase, $235,000 is due to an increase in cost
reimbursements to the Trust's advisor, $129,000 is due to increased professional
fees and $127,000 is due to trustees and officers insurance premiums and other
fees.
The Trust's equity in earnings of partnerships was $228,000 in 1996 as compared
to $99,000 in 1997. Included in equity earnings of partnerships in 1997 is a
$49,000 loss on sale of real estate, the Trust's equity share of the loss
recognized by Indcon, L.P. ("Indcon"), a joint venture partnership at the time,
on the sale of one of its industrial warehouses. In October 1997, the Trust
purchased the remaining 40% interest in Indcon. Included in the 1996 equity in
earnings of partnerships is a $370,000 gain on sale of real estate, the Trust's
equity share of the gain recognized by Indcon on the sale of 27 of its
industrial warehouses. Excluding such gain and loss, the Trust's equity in
earnings of partnerships would have been a loss of $143,000 in 1996 and income
of $148,000 in 1997. Equity in earnings of partnerships is expected to be
minimal in 1998 as a result of the Trust's purchase of the remaining 40%
interest in Indcon. See NOTE 6. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS."
In 1997, the Trust recognized gains on the sale of real estate consisting of
$5.4 million on the sale of Tollhill West Office Building
32
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
in April 1997, $1.4 million on the sale of 2626 Cole Office Building in May
1997, $1.5 million on the sale of Northpoint Central Office Building in October
1997, a loss of $245,000 on the sale of the Builders Square Shopping Center in
September 1997 and recognized a deferred gain of $141,000 on the payoff of a
mortgage note receivable. In 1996, the Trust recognized gains on the sale of
real estate consisting 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 AND DEPRECIATION." In 1996, the Trust also recognized a gain of
$725,000 on the sale of equity securities. See NOTE 5. "INVESTMENT IN MARKETABLE
EQUITY SECURITIES."
The Trust recognized no extraordinary gains in 1997. In 1996, the Trust
recognized an extraordinary gain of $149,000 representing an insurance
settlement for a fire loss at an apartment complex received subsequent to its
sale. 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 for a fire loss to an industrial warehouse owned by Indcon that was
not expected to be rebuilt. See NOTE 6. "INVESTMENTS IN EQUITY METHOD
PARTNERSHIPS."
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.
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.
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.
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.
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.
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, due to the increase in the Trust's gross assets, the basis for
such fee. 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.
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.
34
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
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, a joint venture partnership, on the sale of 27 of its
industrial warehouses. See NOTE 6. "INVESTMENTS IN EQUITY METHOD 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, 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 EQUITY METHOD
PARTNERSHIPS."
In 1996, the Trust recognized gains on the sale of real estate consisting 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 AND DEPRECIATION."
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 for a fire loss at an apartment complex received subsequent
to its sale. 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 for a fire loss to an industrial warehouse owned by Indcon. See NOTE
6. "INVESTMENTS IN EQUITY METHOD PARTNERSHIPS that was not expected to be
rebuilt." The Trust recognized no extraordinary gains in 1995.
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.
35
<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Inflation
The effects of inflation on the Trust's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with increases and
decreases in housing costs. Fluctuations in the rate of inflation also affect
the sales values of properties and, correspondingly, the ultimate gains to be
realized by the Trust from property sales. Inflation also has an effect on the
Trust's earnings from short-term investments.
Tax Matters
For the years ended December 31, 1997, 1996 and 1995, 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.
Year 2000
The Trust's advisor has advised the Trust that its current computer software has
been certified by the Information Technology Association of America ("ITAA") as
year 2000 compliant. The Trust's Advisor has also advised the Trust that it has
recently received and plans to install in 1998 the ITAA certified year 2000
compliant operating system for its computer hardware.
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Continental Mortgage and Equity Trust Page
- ------------------------------------- ----
<S> <C>
Report of Independent Certified Public Accountants ......... 38
Consolidated Balance Sheets -
December 31, 1997 and 1996 .............................. 39
Consolidated Statements of Operations -
Years Ended December 31, 1997, 1996 and 1995 ............ 40
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1997, 1996 and 1995 ............ 41
Consolidated Statements of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995 ............ 42
Notes to Consolidated Financial Statements ................. 45
Schedule III - Real Estate and Accumulated Depreciation .... 67
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.
37
<PAGE> 38
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, 1997 and 1996 and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, 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 6, 1998
38
<PAGE> 39
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
--------- ---------
(dollars in thousands)
<S> <C> <C>
Assets
------
Notes and interest receivable
Performing ............................................................ $ 2,853 $ 6,268
Nonperforming and/or nonaccruing ...................................... 2,257 2,287
--------- ---------
5,110 8,555
Less - allowance for estimated losses .................................... (1,481) (1,481)
--------- ---------
3,629 7,074
Foreclosed real estate held for sale, net of
accumulated depreciation ($725 in 1997 and
1996) ................................................................. 5,670 5,738
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 ($19,393 in 1997
and $16,713 in 1996) .................................................. 250,084 214,460
Investment in marketable equity securities of
affiliates, at market ................................................. 13,042 6,192
Investment in partnerships ............................................... 144 2,293
Cash and cash equivalents ................................................ 3,088 2,961
Other assets (including $791 in 1997 and
$650 in 1996 from affiliates) ......................................... 17,773 11,292
--------- ---------
$ 299,370 $ 250,010
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes and interest payable ............................................... $ 199,712 $ 160,554
Other liabilities (including $2,381 in 1997 and
$1,318 in 1996 to affiliates) ......................................... 11,615 10,273
--------- ---------
211,327 170,827
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value; authorized shares, unlimited;
issued and outstanding, 4,021,470 shares in 1997 and
4,026,376 shares in 1996 .............................................. 8,054 8,068
Paid-in capital .......................................................... 257,101 257,159
Accumulated distributions in excess of
accumulated earnings .................................................. (188,849) (190,931)
Net unrealized gains on marketable equity
securities ............................................................ 11,737 4,887
--------- ---------
88,043 79,183
--------- ---------
$ 299,370 $ 250,010
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
39
<PAGE> 40
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Revenues
Rents ........................................... $ 55,180 $ 44,244 $ 37,586
Interest ........................................ 1,295 1,119 723
----------- ----------- -----------
56,475 45,363 38,309
Expenses
Property operations (including
$1,771 in 1997, $975 in 1996 and
$806 in 1995 to affiliates) .................. 32,041 26,738 22,682
Interest ........................................ 17,142 12,773 10,009
Depreciation .................................... 6,236 4,819 4,279
Provision for losses ............................ -- (884) 541
Advisory fee to affiliate ....................... 1,496 1,091 1,264
Incentive and net income fees to
affiliate .................................... 1,005 1,049 --
General and administrative
(including $1,060 in 1997, $825
in 1996 and $506 in 1995 to
affiliate) ................................... 2,727 2,213 1,207
----------- ----------- -----------
60,647 47,799 39,982
----------- ----------- -----------
(Loss) from operations ............................. (4,172) (2,436) (1,673)
Equity in income of partnerships ................... 99 228 230
Gain on sale of real estate and
marketable equity securities .................... 8,249 10,122 --
----------- ----------- -----------
Income (loss) before extraordinary
gain ............................................ 4,176 7,914 (1,443)
Extraordinary gain ................................. -- 812 --
----------- ----------- -----------
Net income (loss) .................................. $ 4,176 $ 8,726 $ (1,443)
=========== =========== ===========
Earnings per share
Income (loss) before extraordinary
gain ............................................ $ 1.04 $ 1.89 $ (.33)
Extraordinary gain ................................. -- .19 --
----------- ----------- -----------
Net income (loss) .................................. $ 1.04 $ 2.08 $ (.33)
=========== =========== ===========
Weighted average shares of
beneficial interest used in
computing earnings per share .................... 4,025,794 4,199,147 4,377,165
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
40
<PAGE> 41
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares of
Beneficial Interest
--------------------------- Paid-in
Shares Amount Capital
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Balance, January 1, 1995 .......... 4,377,199 8,766 260,060
Fractional shares of
beneficial interest
acquired ....................... (58) -- --
Distributions ($.40 per
share) ......................... -- -- --
Unrealized gains on market-
able equity securities ......... -- -- --
Net (loss) ........................ -- -- --
---------- ---------- ----------
Balance, December 31, 1995 ........ 4,377,141 8,766 260,060
Repurchase of shares of
beneficial interest ............ (350,765) (698) (2,901)
Distributions ($.89 per
share) ......................... -- -- --
Unrealized gains on market-
able equity securities ......... -- -- --
Net income ........................ -- -- --
---------- ---------- ----------
Balance, December 31, 1996 ........ 4,026,376 8,068 257,159
Repurchase of shares of
beneficial interest ............ (4,500) (14) (58)
Fractional shares of bene-
ficial interest acquired ....... (406) -- --
Distributions ($.52 per
share) ......................... -- -- --
Unrealized gains on market-
able equity securities ......... -- -- --
Net income ........................ -- -- --
---------- ---------- ----------
Balance, December 31, 1997 ........ 4,021,470 $ 8,054 $ 257,101
========== ========== ==========
<CAPTION>
Accumulated Unrealized
Distributions Gains on
in Excess of Marketable
Accumulated Equity Shareholders'
Earnings Securities Equity
------------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Balance, January 1, 1995 .......... (192,676) 2,617 78,767
Fractional shares of
beneficial interest
acquired ....................... -- -- --
Distributions ($.40 per
share) ......................... (1,751) -- (1,751)
Unrealized gains on market-
able equity securities ......... -- 412 412
Net (loss) ........................ (1,443) -- (1,443)
---------- ---------- ----------
Balance, December 31, 1995 ........ (195,870) 3,029 75,985
Repurchase of shares of
beneficial interest ............ -- -- (3,599)
Distributions ($.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 ........ (190,931) 4,887 79,183
Repurchase of shares of
beneficial interest ............ -- -- (72)
Fractional shares of bene-
ficial interest acquired ....... -- -- --
Distributions ($.52 per
share) ......................... (2,094) -- (2,094)
Unrealized gains on market-
able equity securities ......... -- 6,850 6,850
Net income ........................ 4,176 -- 4,176
---------- ---------- ----------
Balance, December 31, 1997 ........ $ (188,849) $ 11,737 $ 88,043
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
41
<PAGE> 42
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rents collected ................................. $ 55,051 $ 43,497 $ 37,610
Interest collected .............................. 1,467 1,041 688
Interest paid ................................... (16,208) (11,259) (8,937)
Payments for property operations
(including $1,771 in 1997, $975 in
1996 and $767 in 1995 to affiliates) ........ (31,329) (24,200) (22,520)
General and administrative expenses
paid (including $1,060 in 1997, $825
in 1996 and $506 in 1995 to
affiliates) .................................. (2,663) (1,414) (1,352)
Advisory, incentive and net income fee
paid to affiliate ............................ (3,536) (1,740) (1,514)
Distributions from partnerships'
operating cash flow .......................... 291 848 41
Other ........................................... 144 16 524
-------- -------- --------
Net cash provided by operating
activities .............................. 2,929 6,789 4,540
Cash Flows from Investing Activities
Acquisitions of real estate
(including $2,445 in 1997, $2,795
in 1996 and $1,581 in 1995 to
affiliates) .................................. (53,886) (31,854) (9,766)
Deposits on pending acquisitions................. (2,467) -- --
Collections on notes receivable ................. 3,426 837 1,081
Fundings of notes receivable .................... (73) (2,000) --
Proceeds from sale of real estate ............... 37,131 14,939 33
Proceeds from sale of marketable
equity securities ............................ -- 554 --
Real estate improvements ........................ (4,972) (3,019) (1,170)
Funding of capital improvement escrow ........... -- (1,500) --
Distributions from partnerships'
investing cash flow .......................... 36 10,720 --
-------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing
activities .............................. (20,805) (11,323) (9,822)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
<PAGE> 43
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from notes payable ........... $ 72,086 $ 34,596 $ 12,506
Payments on notes payable ............. (49,247) (23,918) (7,590)
Distributions to shareholders ......... (2,094) (3,787) (1,751)
Repurchase of shares of beneficial
interest ........................... (72) (3,599) --
Deferred financing costs .............. (2,670) (2,183) --
Distributions from partnerships'
financing cash flows ............... -- -- 1,025
-------- -------- --------
Net cash provided by financing
activities ................... 18,003 1,109 4,190
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ...................... 127 (3,425) (1,092)
Cash and cash equivalents, beginning
of year ............................... 2,961 6,386 7,478
-------- -------- --------
Cash and cash equivalents, end of
year .................................. $ 3,088 $ 2,961 $ 6,386
======== ======== ========
Reconciliation of net income (loss) to
net cash provided by operating
activities
Net income (loss) .................. $ 4,176 $ 8,726 $ (1,443)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities
Gain on sale of real estate and
marketable equity securities .... (8,249) (10,122) --
Extraordinary gain ................. -- (812)
Depreciation ....................... 6,236 4,795 4,240
Equity in (income) of
partnerships .................... (99) (228) (230)
Provision for losses ............... -- (884) 541
Decrease (increase) in interest
receivable ...................... 172 (53) (1)
Decrease in other assets ........... 126 69 432
(Decrease) increase in other
liabilities ..................... (658) 3,598 204
Increase in interest payable ....... 934 852 756
Distributions from partnerships'
operating cash flow ............. 291 848 41
-------- -------- --------
Net cash provided by operating
activities ................ $ 2,929 $ 6,789 $ 4,540
======== ======== ========
</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 (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Schedule of noncash investing activities
Carrying value of real estate obtained
in satisfaction of note receivable
(with carrying value of $891) ..... $ -- $ -- $ 891
Mortgage notes receivable from real
estate sales ...................... -- 750 --
Notes payable from acquisition of
real estate ....................... 16,257 6,086 31,022
Unrealized gains on marketable equity
securities ........................ 6,850 1,858 412
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
44
<PAGE> 45
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 1996 have been reclassified to conform to the 1997
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. 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.
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 6, 1998 the Trust's advisor and its
affiliates held shares representing approximately 54.9% 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
45
<PAGE> 46
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenues and expenses for the
year then ended. Actual results could differ from these estimates.
Interest recognition on notes receivable. It is the Trust's policy to cease
recognizing interest income on notes receivable that have been delinquent for 60
days or more. In addition, accrued but unpaid interest income is only recognized
to the extent that the net realizable value of the underlying collateral exceeds
the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for estimated
losses on notes receivable 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 fair value of the collateral securing such note.
Real Estate Held for Investment and Depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS 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 depreciated.
46
<PAGE> 47
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.
47
<PAGE> 48
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>
1997 1996
--------------------------------- --------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Notes receivable
Performing ........................... $ 3,118 $ 3,102 $ 6,911 $ 6,555
Nonperforming and/or
nonaccruing........................ 2,200 2,200 2,100 2,100
-------------- ------------ ------------ -------------
$ 5,318 5,302 $ 9,011 8,655
============== ============
Unamortized (discounts).................. (277) (351)
Deferred gain............................ -- (67)
Interest receivable...................... 85 318
------------ -------------
$ 5,110 $ 8,555
============ =============
</TABLE>
The Trust does not recognize interest income on nonperforming notes receivable.
For the years 1997, 1996 and 1995, unrecognized interest income on nonperforming
notes totaled $267,000, $193,000 and $554,000, respectively.
Notes receivable at December 31, 1997 mature from 1998 through 2017, with
interest rates ranging from 6.5% to 12.0% and a weighted average rate of 10.9%.
Discounts were based on interest rates at the time of origination. Notes
receivable are nonrecourse and are collateralized by real estate.
At December 31, 1997, one of the Trust's mortgage notes receivable with a
principal balance of $700,000 was in default. The note matured in July 1993. The
Trust continues to receive partial interest payments monthly on the note from
the borrower. The Trust is evaluating its options with respect to foreclosure of
the collateral property and the Trust does not anticipate incurring a loss
beyond the established reserve.
One of the Trust's mortgage notes receivable matured in November 1995. In
February 1997, the Trust received a payment of $470,000 from the borrower,
$305,000 being applied against accrued but unpaid interest and $165,000 being
applied to reduce the principal balance of the note. In September 1997, the
Trust received $1.4 million in full payment of principal and all accrued but
unpaid interest.
As more fully discussed in NOTE 7. "NOTES AND INTEREST PAYABLE," ten of the
Company's mortgage notes receivable, with a combined principal balance, at the
time, of $2.8 million were pledged as additional collateral on a $4.0 million
loan, primarily secured by the AMOCO Building in New Orleans, Louisiana. In
June, August and November 1997, three of the mortgage notes receivable, with a
combined principal balance of $1.3 million were paid in full. Such payments were
remitted
48
<PAGE> 49
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
to the lender as a paydown of the mortgage debt. In March 1998, the note payable
secured by the AMOCO Building was refinanced and the collateral notes were
released. See NOTE 17. "SUBSEQUENT EVENTS."
In June 1997, the Trust obtained financing in the amount of $1.4 million secured
by the mortgage note receivable secured by the Cypress Creek Office Building in
Fort Lauderdale, Florida. The financing bears interest at a variable rate,
currently 9.0% per annum, requires monthly principal and interest payments of
$14,126 and matures in June 2009.
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 the borrower having an option to extend the
note's maturity 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 that 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. At December 31, 1996, the Trust had
funded the entire $500,000. The note bore interest at 13% per annum and all
interest and principal was payable at the December 31, 1996 maturity date. The
note's maturity was subsequently extended upon payment of all accrued interest.
The note and all accrued but unpaid interest was paid in full in June 1997.
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance January 1, ........... $ 1,481 $ 6,305 $ 9,223
Provision for losses ......... -- -- 541
Write down of properties ..... -- (4,648) (700)
Amounts charged off .......... -- (176) (2,759)
------- ------- -------
Balance December 31, ......... $ 1,481 $ 1,481 $ 6,305
======= ======= =======
</TABLE>
The provision for losses in the accompanying Consolidated Statement of
Operations for 1996 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 to the lender. See NOTE 7. "NOTES AND
INTEREST PAYABLE."
49
<PAGE> 50
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION
In January 1997, the Trust purchased the Madison at Bear Creek 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.
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 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.
In April 1997, the Trust sold Tollhill West, a 159,546 square foot office
building in Dallas, Texas, for $14.8 million in cash. The Trust received net
cash of $9.0 million after the payoff of $5.0 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.
Also in April 1997, the Trust purchased the OPUBCO land, 156 acres of
undeveloped land in Collin County, Texas, for $3.0 million. In conjunction with
the purchase, the Trust obtained mortgage financing secured by the land and by
two other parcels of land in the amount of $4.2 million. The Trust received net
cash of $1.2 million.
In May 1997, the Trust sold 2626 Cole, a 119,632 square foot office building in
Dallas, Texas, for $11.0 million in cash. The Trust received net cash of $4.2
million after the payoff of $6.5 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Trust recognized
a gain of $1.4 million on the sale.
Also in May 1997, the Trust purchased the Trails at Windfern, a 240 unit
apartment complex in Houston, Texas, for $4.2 million. The Trust paid $769,000
in cash, assumed the existing mortgage of $3.2 million with the seller providing
purchase money financing of an additional $150,000.
In June 1997, the Trust purchased Bay Plaza, a 75,780 square foot office
building in Tampa, Florida, for $4.3 million. The Trust paid $1.2 million in
cash, assumed the existing mortgage of $2.1 million with the seller providing
purchase money financing of an additional $1.0 million.
Also in June 1997, the Trust purchased the Stacy Road land, 163 acres of
undeveloped land in Allen, Texas, for $2.5 million. The Trust paid $800,000 in
cash and obtained new mortgage financing of $1.7 million.
50
<PAGE> 51
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In July 1997, the Trust purchased Durham Centre, a 207,171 square foot office
building in Durham, North Carolina, for $20.5 million. The Trust paid $5.7
million in cash and obtained new mortgage financing of $14.8 million.
In August 1997, the Trust purchased the McKinney 140 land, 140 acres of
undeveloped land in McKinney, Texas, for $2.6 million. The Trust paid $898,000
in cash and obtained new mortgage financing of $1.7 million.
Also in August 1997, the Trust sold Builders Square, a 115,492 square foot
shopping center in St. Paul, Minnesota, for $2.4 million in cash. The Trust
received net cash of $1.5 million after the payoff of $873,000 in existing
mortgage debt and the payment of various closing costs associated with the sale.
The Trust recognized a loss of $245,000 on the sale.
Further in August 1997, the Trust purchased the Eagle Rock Apartments, a 99 unit
apartment complex in Los Angeles, California, for $4.4 million. The Trust paid
$1.1 million in cash with the seller providing purchase money financing of $3.3
million.
In October 1997, the Trust sold Northpoint Central, a 176,043 square foot office
building in Houston, Texas, for $11.0 million. The Trust received net cash of
$4.7 million after the payoff of $5.8 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Trust recognized
a gain of $1.4 million on the sale.
Also in October 1997, the Trust purchased the Westgrove Air Plaza, a 78,326
square foot combination aircraft hangar and office building in Addison, Texas,
for $2.4 million. The Trust paid $1.2 million in cash with the seller providing
$1.2 million of purchase money financing.
Further in October 1997, the Trust purchased the Cypresstree Apartments, a 168
unit apartment complex in Houston, Texas, for $3.2 million. The Trust paid
$550,000 in cash with the seller providing $2.6 million of purchase money
financing.
In December 1997, the Trust sold .2 acres of the parcel of Northwest Crossing
land in Houston, Texas, for $72,000 in cash. The Trust recognized no gain or
loss on the sale.
In 1996, the Trust purchased four apartment complexes: Grove Park, a 188 unit
apartment complex in Plano, Texas; Park at Colonnade, a 211 unit apartment
complex in San Antonio, Texas; Glenwood, a 168 unit apartment complex in
Addison, Texas; and Oak Run, a 160 unit apartment complex in Pasadena, Texas;
eight commercial properties: Hampton Court, a 104,001 square foot office
building in Dallas, Texas; Amoco Building, a 378,244 square foot office building
in New Orleans, Louisiana; Central Storage Warehouse, a 216,035 square foot
industrial warehouse in Dallas, Texas; Promenade, a 133,558 square foot shopping
center in Highlands Ranch, Colorado; 3400 Carlisle, a 74,000 square foot office
building in Dallas, Texas; Shady Trail Warehouse, a 42,900
51
<PAGE> 52
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
square foot industrial warehouse in Dallas, Texas; Northpoint Central, a 176,043
square foot office building in Houston, Texas; and 2626 Cole, a 199,632 square
foot office building in Dallas, Texas; and one parcel of undeveloped land on
State Highway 121 in Collin County, Texas. The Trust paid $25.4 million in cash
and either obtained new mortgage financing or assumed existing mortgage debt for
the remaining $42.1 million of the purchase prices.
Also in 1996, the Trust sold five apartment complexes: Rivertree in Hurst,
Texas; Sunset Towers in San Francisco, California; Crystal Court in Detroit,
Michigan; Southgate Square in Round Rock, Texas; and Ravenswood in Stratford,
New Jersey; and .60 acres of the 6 acre parcel of Northwest Crossing land in
Houston, Texas. The Trust received $15.4 million in cash after the payoff of
$16.9 million in existing mortgage debt and the payment of various closing costs
associated with the sales. The Trust recognized an aggregate gain of $9.4
million on the sales. The Trust also returned the Genesee Towers, an office
building in Flint, Michigan, to the lender. See NOTE 7. "NOTES AND INTEREST
PAYABLE."
NOTE 5. INVESTMENT IN MARKETABLE EQUITY SECURITIES
The Trust's investments in marketable equity securities consist of the
following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
American Realty Trust, Inc. ("ART") ................... $11,760 $ 5,318
Transcontinental Realty Investors, Inc.("TCI") ........ 1,282 874
------- -------
$13,042 $ 6,192
======= =======
</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 officers of the Trust are also officers of ART
and TCI. The Trust's advisor also serves as advisor to ART and TCI.
In December 1996, the Trust sold 84,580 shares of beneficial interest of
National Income Realty Trust ("NIRT") back 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 8.0% per annum. Margin borrowings were
$376,000 at December 31, 1997 and $597,000 at December 31, 1996 and are included
in other liabilities in the accompanying Consolidated Balance Sheets.
52
<PAGE> 53
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>
1997 1996
------ ------
<S> <C> <C>
Sacramento Nine ("SAC 9") ......... $ 144 $ 118
Indcon, L.P. ("Indcon"), .......... -- 2,175
------ ------
$ 144 $2,293
====== ======
</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.
The Trust and NIRT were, until October 1997, the partners in Indcon, a joint
venture partnership in which the Trust had a 60% partnership interest. At
December 31, 1996, the partnership owned five industrial warehouses. The Trust,
as a noncontrolling partner, accounted for its investment in the partnership
using the equity method.
In October 1997, the Trust purchased NIRT's 40% interest in the Indcon
partnership, for $1.6 million in cash. In conjunction with the purchase, the
Trust obtained new mortgage financing of $1.8 million secured by three of the
partnership's previously unencumbered properties. The Trust received net cash of
$45,000 after the payment of various closing costs associated with the purchase
and financing.
In August 1997, Indcon sold one of its industrial warehouse properties for
$60,000 in cash, of which the Trust's equity share was $36,000. The partnership
recognized a loss of $82,000 on the sale, of which the Trust's equity share was
$49,000.
In February and March 1996, Indcon sold 25 of its industrial warehouses for a
total of $36.2 million in cash. The partnership received net cash of $14.2
million after the payoff of $23.5 million in existing mortgage debt, of which
the Trust's equity share was $8.5 million. The partnership 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. The Partnership received $2.2 million
in cash. The partnership did not intend to rebuild the destroyed warehouse and
accordingly 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. The partnership
recognized a loss of $522,000 on the sale, of which the Trust's equity share was
$313,000.
53
<PAGE> 54
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>
1997 1996
------- -------
<S> <C> <C>
Real estate, net of accumulated
depreciation ($2,686 in 1997 and
$4,636 in 1996) ............................... $ 4,243 $ 7,878
Other assets ..................................... 495 877
Notes payable .................................... (4,131) (4,548)
Other liabilities ................................ (137) (176)
------- -------
Partners' capital ................................ $ 470 $ 4,031
======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Rents ............................. $ 1,762 $ 2,412 $ 7,766
Depreciation ...................... (438) (505) (2,080)
Property operations ............... (490) (848) (2,186)
Interest .......................... (381) (958) (3,506)
Provision for losses .............. (82) -- --
------- ------- -------
Income (loss) before gain
on sale of real estate
and extraordinary gain ......... 371 101 (6)
Gain on sale of real estate ....... -- 95 --
Extraordinary gain ................ -- 1,105 --
------- ------- -------
Net income (loss) ................. $ 371 $ 1,301 $ (6)
======= ======= =======
</TABLE>
NOTE 7. NOTES AND INTEREST PAYABLE
Notes and interest payable consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Notes payable ........... $198,523 $198,947 $158,222 $159,726
======== ========
Interest payable ........ 765 828
-------- --------
$199,712 $160,554
======== ========
Scheduled principal payments on notes payable are due as follows:
</TABLE>
<TABLE>
<S> <C>
1998................................................................ $ 16,553
1999................................................................ 34,794
2000................................................................ 30,752
2001................................................................ 14,834
2002................................................................ 7,685
Thereafter.......................................................... 94,329
--------
$198,947
========
</TABLE>
54
<PAGE> 55
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
Notes payable at December 31, 1997 bear interest at rates ranging from 4.0% to
10.5%, mature between 1998 and 2019, are generally nonrecourse and are
collateralized by deeds of trust on real estate with a carrying value of $254.4
million and by mortgage notes receivable with a combined principal balance of
$3.1 million.
In 1997, the Trust purchased four apartment complexes, four office buildings and
three industrial properties and five parcels of land for a total of $67.2
million. In conjunction with the acquisitions, the Trust either assumed existing
mortgage debt or obtained new mortgage financing totaling $49.5 million. The
mortgages bear interest at rates ranging from 8.0% to 10.5% per annum, require
monthly payments of principal and interest, currently totaling $420,432, and
mature from April 1998 to June 2009.
In March 1997, the Trust obtained mortgage financing in the amount of $4.0
million secured by the previously unencumbered AMOCO Building, in New Orleans,
Louisiana and by ten mortgage notes receivable, with a combined principal
balance, at the time, of $2.8 million. The Trust received net cash of $3.8
million after payment of various closing costs associated with the financing.
The mortgage bore interest at 9.0% per annum, required monthly payments of
principal and interest of $35,989 and was scheduled to mature in March 1999. As
discussed in NOTE 2. "NOTES AND INTEREST RECEIVABLE," three of the mortgage
notes receivable, with a combined principal balance of $1.3 million, were paid
in full in June, August and November 1997. Such payments were remitted to the
lender as a paydown of the mortgage. In March 1998, the mortgage debt was
refinanced. See NOTE 17. "SUBSEQUENT EVENTS."
In April 1997, the Trust refinanced the mortgage debt secured by the Willo-Wick
Apartments in Pensacola, Florida in the amount of $3.3 million. The Trust
received net cash of $311,000 after the payoff of $2.8 million in existing
mortgage debt and the payment of various closing costs associated with the
refinancing. The new mortgage bears interest at 9.13% per annum, requires
monthly payments of principal and interest of $27,988 and matures in May 2007.
In May 1997, the Trust modified and extended the mortgage secured by the Rio
Pinar Shopping Center in Orlando, Florida. In conjunction with the modification,
the Trust made a principal reduction payment of $500,000. The modified and
extended mortgage bears interest at 9.0% per annum, requires monthly payments of
principal and interest of $49,465 and has an extended maturity of March 1999.
$1.0 million of the mortgage is recourse to the Trust.
In June 1997, the Trust refinanced the mortgage debt secured by the Northgate
Distribution Center in Marietta, Georgia in the amount of $4.7 million. The
Trust received net cash of $1.4 million after the payoff of $3.0 million in
existing mortgage debt, the funding of escrows and
55
<PAGE> 56
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
the payment of various closing costs associated with the financing. The new
mortgage bears interest at 8.82% per annum, requires monthly payments of
principal and interest of $38,947 and matures in July 2007.
Also in June 1997, the Trust refinanced the mortgage debt secured by the
Edgewood Apartments in Lansing, Illinois in the amount of $9.4 million. The
Trust received net cash of $858,000 after the payoff of $8.0 million in existing
mortgage debt, the funding of escrows and the payment of various closing costs
associated with the refinancing. The new mortgage bears interest at 7.96% per
annum, requires monthly payments of principal and interest of $68,529 and
matures in July 2007.
In July 1997, the Trust refinanced the mortgage debt secured by the Heritage on
the River Apartments in Jacksonville, Florida in the amount of $8.0 million. The
Trust received net cash of $1.0 million after the payoff of $6.5 million in
existing mortgage debt, the funding of escrows and the payment of various
closing costs associated with the refinancing. The new mortgage bears interest
at 8.125% per annum, requires monthly payments of principal and interest of
$59,400 and matures in August 2007.
In December 1997, the Trust refinanced the mortgage debt secured by the Grove
Park Apartments in Plano, Texas in the amount of $4.8 million. The Trust
received net cash of $1.3 million after the payoff of $3.2 million in existing
mortgage debt, the funding of escrows and the payment of various closing costs
associated with the financing. The new mortgage bears interest at 7.32% per
annum, requires monthly payments of principal and interest of $32,600 and
matures in January 2008.
Also in December 1997, the Trust refinanced the mortgage debt secured by the
Park at Colonnade Apartments in San Antonio, Texas in the amount of $4.2
million. The Trust received net cash of $502,000 after the payoff of $3.5
million in existing mortgage debt, the funding of escrows and the payment of
various closing costs associated with the financing. The new mortgage bears
interest at 7.32% per annum, requires monthly payments of principal and interest
of $28,900 and matures in January 2008.
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
mortgages bore interest at rates ranging from 8.0% to 10.0% per annum, required
monthly payments of principal and interest totaling $315,849 and matured from
June 1997 to November 2004.
Also in 1996, the Trust refinanced the mortgage debt secured by seven apartment
complexes and obtained mortgage financing for two previously unencumbered
apartment complexes and one previously unencumbered
56
<PAGE> 57
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
commercial property in the total amount of $33.2 million. The Trust received net
cash of $9.7 million after the payoff of $22.2 million in existing mortgage
debt. The remainder of the refinancing proceeds were used to fund escrows and
pay various closing costs associated with the financings. The mortgages bore
interest rates ranging from 8.3% to 9.125% per annum, required monthly payments
of principal and interest totaling $272,000 and matured from May 2006 to July
2011.
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 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 with the deed to the property being
placed in escrow. 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 losses of $884,000 with the elimination of its
obligation for such accrued interest on the transfer of the property to the
lender. See NOTE 3. "ALLOWANCE FOR ESTIMATED LOSSES."
NOTE 8. DISTRIBUTIONS
The Trust has paid regular quarterly distributions to its shareholders since the
first quarter of 1993. In 1997, the Trust paid regular distributions of $.52 per
share of beneficial interest totaling $2.1 million. In 1996, the Trust paid
regular and special distributions of $.89 per share of beneficial interest
totaling $3.8 million. In 1995, the Trust paid regular distributions of $.40 per
share of beneficial interest totaling $1.8 million.
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1997 and 1996 represented capital gains and that 100% of
the distributions paid in 1995 represented a return of capital.
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.
57
<PAGE> 58
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
At the Trust's annual meeting of shareholders held on May 8, 1997, 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.
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
58
<PAGE> 59
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
specified in the Declaration of Trust. The effect of this limitation was to
require that BCM refund $606,000, $589,000 and $250,000 of the annual advisory
fee for 1997, 1996 and 1995, respectively.
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) First Equity Properties, Inc. ("First Equity"),
which is 50% owned by BCM, (ii) Gene E. Phillips and (iii) a trust for
the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts
the property-level management and leasing of eighteen of the Trust's
commercial properties to Carmel Realty, which is owned by First Equity.
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 purchases and
sales, in accordance with a sliding scale of total brokerage fees to be paid by
the Trust.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
59
<PAGE> 60
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>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Fees
Advisory ....................... $1,496 $1,091 $1,264
Incentive sales ................ 667 342 --
Net income ..................... 338 707 --
Real estate brokerage .......... 3,347 4,217 1,581
Mortgage brokerage and
equity refinancing ........... 398 333 142
Property and construction
management fees and
leasing commissions* ......... 1,771 1,048 806
------ ------ ------
$8,017 $7,738 $3,793
====== ====== ======
Cost reimbursements ............... $1,060 $ 825 $ 506
====== ====== ======
</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, 1997:
<TABLE>
<S> <C>
1998............................................ $18,134
1999............................................ 15,237
2000............................................ 12,023
2001............................................ 8,909
2002............................................ 6,364
Thereafter...................................... 8,200
-------
$68,867
=======
</TABLE>
NOTE 14. INCOME TAXES
For the years 1997, 1996 and 1995, 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."
60
<PAGE> 61
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 1997, 1996 (after
applying net operating loss carryforwards) and 1995; 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, 1997, the Trust's tax basis in
its net assets exceeded its basis for financial statement purposes by $30.0
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, 1997, the Trust had a tax net
operating loss carryforwards of $43.5 million expiring through 2011.
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 "Olive Modification") that settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and 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 the various parties. The
Court issued no ruling or order with respect to the matters addressed at the
hearings.
61
<PAGE> 62
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (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 Trust's
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 provides for the addition of four 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 Olive Amendment, all shares of the Trust owned by Gene E. Phillips or
any of his affiliates shall be voted at all shareholder meetings of the Trust
held until April 28, 1999 in favor of all new members of the Trust's Board of
Trustees added under the Olive Amendment. The Olive Amendment also requires
that, until April 28, 1999, all shares of the Trust owned by Mr. 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.
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.
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.]
62
<PAGE> 63
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 1997 and 1996 (unaudited).
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Revenues .......................... $ 13,341 $ 13,330 $ 14,688 $ 15,116
Expenses .......................... 13,786 15,009 15,647 16,205
-------- -------- -------- --------
(Loss) from operations ............ (445) (1,679) (959) (1,089)
Equity in income (loss) of
partnerships ................. 47 26 (17) 43
Gain (loss) on sale of real
estate ....................... -- 6,810 (245) 1,684
-------- -------- -------- --------
Net income (loss) ................. $ (398) $ 5,157 $ (1,221) $ 638
======== ======== ======== ========
Earnings per share
Net income (loss) ................. $ (.10) $ 1.28 $ (.30) $ .16
======== ======== ======== ========
</TABLE>
The Trust purchased eleven income producing properties in 1997 consisting of one
apartment complex and one office building in the first quarter, one apartment
complex and one office building in the second quarter, one office building and
one apartment complex in the third quarter and one apartment complex, one
combination office building/aircraft hangar and three industrial warehouses in
the fourth quarter.
In the second quarter of 1997, the Trust recognized gains on sales of two office
buildings totaling $6.8 million. In the third quarter, the Trust recognized a
loss on the sale of a shopping center of $245,000. In the fourth quarter, the
Trust recognized a gain on the sale of an office building of $1.5 million and a
deferred gain on the payoff of a mortgage note receivable of $141,000.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
63
<PAGE> 64
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
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
1996
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.
NOTE 17. SUBSEQUENT EVENTS
At December 31, 1997, the Edgewood Apartments, a 353 unit apartment complex in
Lansing, Illinois, was under contract for sale. In January 1998, the Trust
completed the sale for $12.1 million in cash. The Trust received net cash of
$2.3 million after the payoff of $9.3 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Trust will
recognize a gain of approximately $5.0 million on the sale.
64
<PAGE> 65
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. SUBSEQUENT EVENTS (Continued)
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 the payoff of $5.4 million in
existing mortgage debt, the funding of escrows and the payment of various
closing costs associated with the financing. 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.
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.
In March 1998, the Trust purchased 1010 Common Street, a 494,579 square foot
office building in New Orleans, Louisiana, for $14.5 million. The Trust paid
$9.0 million in cash and obtained new mortgage financing of $12.0 million,
inclusive of a $3.8 million tenant improvement escrow holdback. The mortgage
bears interest at 9.7% per annum, requires monthly payments of interest only and
matures in March 2001.
Also in March 1998, the Trust purchased 225 Baronne Street, a 416,834 square
foot office building in New Orleans, Louisiana, for $11.2 million. The Trust
paid $2.2 million in cash and obtained new mortgage financing of $9.0 million,
inclusive of a $1.6 million tenant improvement escrow holdback. The mortgage
bears interest at 9.7% per annum, requires monthly payments of interest only and
matures in March 2001.
Further in March 1998, the Trust refinanced the mortgage debt secured by the
AMOCO Building in New Orleans, Louisiana, and by seven mortgage notes receivable
in the amount of $16.0 million. The Trust received net cash of $11.9 million
after the payoff of $3.8 million in existing mortgage debt, the payment of
various closing costs associated with the financing and the funding of a $1.0
million tenant improvement escrow. The new mortgage bears interest at 8.7% per
annum, requires monthly payments of interest only and matures in March 2001.
The mortgage debt secured by the above three New Orleans properties is
cross-collateralized. Both BCM and CMET have guaranteed the monthly interest
payments. The lender has committed to lend CMET an additional $163.0 million
during the next twenty-four months. In exchange for this commitment, the lender
may record a second
65
<PAGE> 66
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. SUBSEQUENT EVENTS (Continued)
lien mortgage on the New Orleans properties 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 CMET or BCM affiliated entities, with the remaining $1.0
million released pro rata as the remaining $100.0 million in new loans are
funded.
66
<PAGE> 67
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
<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)
<C> <C> <C> <C> <C> <C> <C> <C>
Properties Held for Investment
- ------------------------------
Apartments
- ----------
4242 Cedar Springs ......... $1,394 $ 372 $1,117 $ 38 $ 372 $1,155 $1,527
Dallas, TX
Apple Creek ................ 1,783 167 946 256 167 1,202 1,369
Dallas, TX
Camelot .................... 3,043 1,230 2,870 125 1,230 2,995 4,225
Largo, FL
Country Crossings .......... 2,708 772 2,444 144 772 2,588 3,360
Tampa, FL
Cypresstree ................ 2,600 661 2,644 -- 661 2,644 3,305
Houston, TX
Eagle Rock ................. 3,263 889 3,556 -- 889 3,556 4,445
Los Angeles, CA
El Chapparal ............... 2,624 279 2,821 523 279 3,344 3,623
San Antonio, TX
Fairways ................... 1,980 657 1,532 109 657 1,641 2,298
Longview, TX
Forest Ridge ............... 1,206 212 849 85 212 934 1,146
Denton, TX
Fountain Lake .............. 2,765 861 2,585 20 861 2,605 3,466
Texas City, TX
Glenwood ................... 2,814 877 3,506 -- 877 3,506 4,383
Addison, TX
Grove Park ................. 4,752 942 3,767 35 942 3,802 4,744
Plano, TX
Heritage on the River ...... 7,979 2,070 6,211 246 2,070 6,457 8,527
Jacksonville, FL
In the Pines ............... 5,885 1,288 5,154 433 1,288 5,587 6,875
Gainesville, FL
Madison at Bear Creek ...... 2,677 738 2,950 22 738 2,972 3,710
Houston, Texas
McCallum Crossing .......... 6,280 2,005 6,017 66 2,005 6,083 8,088
Dallas, TX
McCallum Glen .............. 5,175 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 .................... 2,598 788 3,152 60 788 3,212 4,000
Pasadena, TX
Park at Colonnade .......... 4,200 887 3,546 358 887 3,904 4,791
San Antonio, TX
Park Lane .................. 1,186 175 978 99 175 1,077 1,252
Dallas, TX
Parkwood Knoll ............. 4,938 1,659 4,975 63 1,659 5,038 6,697
San Bernardino, CA
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Depreciation Construction Acquired is Computed
------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
Properties Held for Investment
- ------------------------------
Apartments
- ----------
4242 Cedar Springs ......... $ 164 1984 Jun-92 5-40 years
Dallas, TX
Apple Creek ................ 321 1971 Dec-90 5-40 years
Dallas, TX
Camelot .................... 386 1975 Aug-93 5-40 years
Largo, FL
Country Crossings .......... 400 1973 Apr-93 5-40 years
Tampa, FL
Cypresstree ................ 16 1980 Oct-97 40 years
Houston, TX
Eagle Rock ................. 37 1984 Aug-97 40 years
Los Angeles, CA
El Chapparal ............... 1,140 1963 Jan-88 5-40 years
San Antonio, TX
Fairways ................... 265 1980 Mar-93 5-40 years
Longview, TX
Forest Ridge ............... 188 1975 Nov-91 5-40 years
Denton, TX
Fountain Lake .............. 253 1975 Feb-94 5-40 years
Texas City, TX
Glenwood ................... 100 1975 Nov-96 40 years
Addison, TX
Grove Park ................. 153 1979 Jun-96 5-40 years
Plano, TX
Heritage on the River ...... 374 1973 Dec-95 5-40 years
Jacksonville, FL
In the Pines ............... 575 1972 Dec-94 5-40 years
Gainesville, FL
Madison at Bear Creek ...... 74 1975 Jan-97 5-40 years
Houston, Texas
McCallum Crossing .......... 595 1985 Mar-94 5-40 years
Dallas, TX
McCallum Glen .............. 324 1986 Jul-95 5-40 years
Dallas, TX
Oak Park IV ................ 75 1981 Jun-94 5-40 years
Clute, TX
Oak Run .................... 87 1982 Dec-96 5-40 years
Pasadena, TX
Park at Colonnade .......... 190 1975 Jul-96 5-40 years
San Antonio, TX
Park Lane .................. 257 1972 Dec-90 5-40 years
Dallas, TX
Parkwood Knoll ............. 426 1986 Aug-94 5-40 years
San Bernardino, CA
</TABLE>
67
<PAGE> 68
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1997
<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)
<C> <C> <C> <C> <C> <C> <C> <C>
Properties Held for Investment - (Continued)
- ------------------------------
Pierce Tower ............... $ 1,917 $ 566 $ 2,262 $ 31 $ 566 $ 2,293 $ 2,859
Denver, CO
Quail Oaks ................. 1,276 90 2,160 141 90 2,301 2,391
Balch Springs, TX
Somerset ................... 3,200 936 2,811 77 936 2,888 3,824
Texas City, TX
Stone Oak .................. 3,134 649 2,598 187 649 2,785 3,434
San Antonio, TX
Sunset Lake ................ 7,779 1,626 6,544 514 1,626 7,058 8,684
Waukegan, IL
Trails at Windfern ......... 3,366 870 3,479 64 870 3,543 4,413
Houston, TX
Willow Creek ............... 1,796 608 1,832 31 608 1,863 2,471
El Paso, TX
Will-O-Wick ................ 3,279 747 2,990 109 747 3,099 3,846
Pensacola, FL
Willow Wick ................ 865 324 1,305 28 324 1,333 1,657
North Augusta, SC
Woodbridge ................. 2,955 899 2,099 157 899 2,256 3,155
Westminster, CO
Industrial Warehouses
- ---------------------
4050 Getwell ............... 805 415 2,239 61 415 2,300 2,715
Memphis, TN
5360 Tulane ................ 215 95 514 11 95 525 620
Atlanta, GA
Brookfield Corporate
Center .................. 2,722 727 2,909 -- 727 2,909 3,636
Chantilly, VA
Central Storage ............ 1,335 464 1,856 251 464 2,107 2,571
Dallas, TX
Kelly Warehouses ........... 4,975 1,136 4,856 350 1,136 5,206 6,342
Dallas, TX
McLeod Commerce Center ..... 2,133 673 2,693 262 673 2,955 3,628
Orlando, FL
Northgate Distribution ..... 4,688 876 3,505 375 876 3,880 4,756
Marietta, GA
Shady Trail ................ 542 145 581 51 145 632 777
Dallas, TX
Space Center ............... 727 247 1,332 25 247 1,357 1,604
San Antonio, TX
Sullyfield Commercial
Center .................. 8,800 2,299 9,196 408 2,299 9,604 11,903
Chantilly, VA
Office Buildings
- -----------------
3400 Carlisle .............. 4,500 1,122 4,487 38 1,122 4,525 5,647
Dallas, TX
Amoco ...................... 2,574(2) 1,233 4,933 2,637 1,233 7,570 8,803
New Orleans, LA
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Depreciation Construction Acquired is Computed
------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
Properties Held for Investment - (Continued)
- ------------------------------
Pierce Tower ............... $ 193 1958 Sep-94 5-40 years
Denver, CO
Quail Oaks ................. 767 1982 Feb-87 5-40 years
Balch Springs, TX
Somerset ................... 306 1985 Dec-93 5-40 years
Texas City, TX
Stone Oak .................. 642 1978 Mar-90 5-40 years
San Antonio, TX
Sunset Lake ................ 686 1969 Sep-94 5-40 years
Waukegan, IL
Trails at Windfern ......... 60 1975 May-97 5-40 years
Houston, TX
Willow Creek ............... 186 1972 May-94 5-40 years
El Paso, TX
Will-O-Wick ................ 214 1974 May-95 5-40 years
Pensacola, FL
Willow Wick ................ 77 1971 Nov-95 5-40 years
North Augusta, SC
Woodbridge ................. 217 1968 Sep-94 5-40 years
Westminster, CO
Industrial Warehouses
- ---------------------
4050 Getwell ............... 802 1970 Nov-97 5-40 years
Memphis, TN
5360 Tulane ................ 184 1970 Nov-97 5-40 years
Atlanta, GA
Brookfield Corporate
Center .................. 151 1990 Dec-95 40 years
Chantilly, VA
Central Storage ............ 111 1966 Apr-96 5-40 years
Dallas, TX
Kelly Warehouses ........... 556 1966-1973 Mar-95 5-40 years
Dallas, TX
McLeod Commerce Center ..... 290 1985 Sep-94 5-40 years
Orlando, FL
Northgate Distribution ..... 530 1987 Nov-93 5-40 years
Marietta, GA
Shady Trail ................ 20 1970 Sep-96 5-40 years
Dallas, TX
Space Center ............... 477 1970 Nov-97 5-40 years
San Antonio, TX
Sullyfield Commercial
Center .................. 679 1986 Feb-95 5-40 years
Chantilly, VA
Office Buildings
- -----------------
3400 Carlisle .............. 173 1985 Jul-96 5-40 years
Dallas, TX
Amoco ...................... 520 1977 Apr-96 5-40 years
New Orleans, LA
</TABLE>
68
<PAGE> 69
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1997
<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)
<C> <C> <C> <C> <C> <C> <C> <C>
Properties Held for Investment - (Continued) (dollars in thousands)
- ------------------------------
Office Buildings - Continued
- -----------------
Bay Plaza .............. $ 3,067 $ 895 $ 3,582 $ -- $ 895 $ 3,582 $ 4,477
Tampa, FL
Durham Centre .......... 14,438 4,233 16,932 -- 4,233 16,932 21,165
Durham, NC
Hampton Court .......... 6,300 1,610 6,439 196 1,610 6,635 8,245
Dallas, TX
Jefferson .............. 9,100 2,774 11,096 208 2,774 11,304 14,078
Washington, DC
NASA ................... -- 410 3,319 (1,098) 410 2,221 2,631
Houston, TX
Westgrove Air Plaza .... 1,188 501 2,004 -- 501 2,004 2,505
Addison, TX
Windsor Plaza .......... -- 1,429 4,441 (592) 1,429 3,849 5,278
Windcrest, TX
Shopping Centers
- ----------------
Promenade .............. 5,448 1,749 6,995 (11) 1,749 6,984 8,733
Highlands Ranch, CO
Rio Pinar .............. 5,395 3,190 5,205 346 3,190 5,551 8,741
Orlando, FL
Land
- ----
5700 Tulane ............ -- -- -- -- -- -- --
Atlanta, GA
McKinney 140 ........... 1,625 2,728 -- -- 2,728 -- 2,728
McKinney, TX
OPUBCO ................. 4,167(3) 3,242 -- -- 3,242 -- 3,242
Collin County, TX
Stacy Road ............. 1,642 2,665 -- -- 2,665 -- 2,665
Allen, TX
State Highway 121 ...... --(3) 4,354 -- -- 4,354 -- 4,354
Collin County, TX
Watters Road ........... --(3) 1,787 -- -- 1,787 -- 1,787
Collin County, TX
--------- --------- --------- --------- --------- ---------- ----------
187,803 67,324 194,515 7,639 67,324 202,154 269,478
--------- --------- --------- --------- --------- ---------- ----------
Properties Held for Sale
- ------------------------
Apartments
- ----------
Edgewood ............... 9,343 598 6,872 1,494 598 8,366 8,964
Lansing, IL
Shadowridge ............ -- 85 338 138 85 476 561
Rock Springs, WY
Industrial Warehouse
- --------------------
Ogden .................. -- 52 1,568 208 52 1,776 1,828
Ogden, UT
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Depreciation Construction Acquired is Computed
------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
Properties Held for Investment - (Continued) (dollars in thousands)
- ------------------------------
Office Buildings - Continued
- -----------------
Bay Plaza .............. $ 52 1974 Jun-97 40 years
Tampa, FL
Durham Centre .......... 212 1988 Jul-97 40 years
Durham, NC
Hampton Court .......... 313 1987 Mar-96 5-40 years
Dallas, TX
Jefferson .............. 256 1963 Feb-97 5-40 years
Washington, DC
NASA ................... 1,223 1979 Oct-85 5-40 years
Houston, TX
Westgrove Air Plaza .... 13 1982 Oct-97 40 years
Addison, TX
Windsor Plaza .......... 1,862 1984 Nov-86 5-40 years
Windcrest, TX
Shopping Centers
- ----------------
Promenade .............. 273 1985 Jul-96 5-40 years
Highlands Ranch, CO
Rio Pinar .............. 949 1984 Dec-91 5-40 years
Orlando, FL
Land
- ----
5700 Tulane ............ -- -- Nov-97 --
Atlanta, GA
McKinney 140 ........... -- -- Aug-97 --
McKinney, TX
OPUBCO ................. -- -- Jun-97 --
Collin County, TX
Stacy Road ............. -- -- Apr-97 --
Allen, TX
State Highway 121 ...... -- -- Oct-96 --
Collin County, TX
Watters Road ........... -- -- Feb-97 --
Collin County, TX
----------
19,394
----------
Properties Held for Sale
- ------------------------
Apartments
- ----------
Edgewood ............... 3,024 1972 Aug-87 5-40 years
Lansing, IL
Shadowridge ............ 89 1973 Jan-91 5-40 years
Rock Springs, WY
Industrial Warehouse
- --------------------
Ogden .................. 608 1979 Jan-86 5-40 years
Ogden, UT
</TABLE>
69
<PAGE> 70
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1997
<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)
<C> <C> <C> <C> <C> <C> <C> <C>
Properties Held for Sale - (Continued)
- ------------------------
Office Building
- ----------------
Pinemont ................... $ 419 $ 175 $ 526 $ 5 $ 175 $ 531 $ 706
Houston, TX
Land
- ----
Del Ray Forum .............. -- 1,202 -- (402)(4) 800 -- 800
Miami, FL
Northwest Crossing ......... -- 1,238 -- (339)(5) 899 -- 899
Houston, TX
Round Mt ................... -- 5,740 -- (4,140)(4) 1,600 -- 1,600
Austin, TX
--------- --------- --------- --------- --------- --------- ----------
9,762 9,090 9,304 (3,036) 4,209 11,149 15,358
--------- --------- --------- --------- --------- --------- ----------
$ 197,565 $ 76,414 $ 203,819 $ 4,603 $ 71,533 $ 213,303 $ 284,836
========= ========= ========= ========= ========= ========= ==========
<CAPTION>
Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Depreciation Construction Acquired is Computed
------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
Properties Held for Sale - (Continued)
- ------------------------
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
----------
3,748
----------
$ 23,142
==========
</TABLE>
(1) The aggregate cost for federal income tax purposes is $303.1 million.
(2) The Amoco loan is also collateralized by seven mortgage notes receivable.
(3) The OPUBCO land is also collateralized by the State Highway 121 and the
Watters Road land.
(4) The carrying value of this property was reduced to the Trust's estimate of
fair value minus estimated costs of sale.
(5) Sale of a portion of land.
70
<PAGE> 71
SCHEDULE III
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1, ....................... $ 237,636 $ 205,269 $ 162,823
Additions
Acquisitions and improvements ......... 72,897 74,414 42,306
Foreclosure ........................... -- -- 891
Other ................................. 4,919 -- --
Deductions
Sales ................................. (30,616) (27,868) (51)
Permanent write-downs ................. -- (4,648) (700)
Foreclosure ........................... -- (9,531) --
--------- --------- ---------
Balance at December 31, ..................... $ 284,836 $ 237,636 $ 205,269
========= ========= =========
Reconciliation of Accumulated
Depreciation
Balance at January 1, ....................... $ 17,438 $ 17,735 $ 13,459
Additions
Depreciation .......................... 6,236 4,819 4,279
Other ................................. 1,427 -- --
Deductions
Sales ................................. (1,959) (4,063) (3)
Foreclosure ........................... -- (1,053) --
--------- --------- ---------
Balance at December 31, ..................... $ 23,142 $ 17,438 $ 17,735
========= ========= =========
</TABLE>
71
<PAGE> 72
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Prior Face Amount
Description Rate Date Periodic Payment Terms Liens of Mortgage
- ------------------- -------- -------- --------------------------------------------- ------- -----------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
FIRST MORTGAGE LOANS
Buena Vista Office 12.00% 7/93 Monthly principal and interest payments $ - $ 700
- ------------------
secured by office of $8,870.
building in
Titusville, FL.
Country Elms 8.00% 5/02 Monthly interest only payments through -- 380
- ------------
secured by mobile home June 1993. Monthly principal and interest
park in Galesburg, IL. payments of $3,154.
Cypress Creek 8.00% 2/09 Monthly payments of principal and interest. 1,383 1,800
- -------------
secured by office to
building in Ft. 9.00%
Lauderdale, FL.
English Hills 8.50% 6/99 Monthly payments of interest only through June -- 590
- -------------
secured by apartment to 1995. Monthly payments of principal and
complex in Tampa, FL. 9.00% interest thereafter.
Forest Ridge 7.50% 5/01 Monthly payments of principal and interest. -- 365
- ------------
secured by shopping to
center in Denton, TX. 8.30%
Residential - various 10.00% 02/05 Monthly fixed principal and -- 432
- ---------------------
5 mortgages secured to to interest payments.
by 5 homes in AZ 11.50% 04/18
and HI.
JUNIOR MORTGAGE LOAN
Signature Athletic Club 12.00% 10/98 Monthly payments of interest only to the -- 1,500
- -----------------------
secured by a building extent of available cash flow. Unpaid
housing a health club interest compounded into principal as of
in Dallas, TX. January 1 of each year.
-------- ---------
$ 1,383 $ 5,767
======== =========
Interest receivable
Allowance for estimated losses
<CAPTION>
Principal Amount of
Carrying Amounts Loans Subject to
of Mortgage Delinquent Principal
Description Net of Discount(1) or Interest
- ------------------- ------------------ --------------------
<S> <C> <C>
FIRST MORTGAGE LOANS
Buena Vista Office $ 700(2) $ 700
- ------------------
secured by office
building in
Titusville, FL.
Country Elms 242(3) --
- ------------
secured by mobile home
park in Galesburg, IL.
Cypress Creek 1,386 --
- -------------
secured by office
building in Ft.
Lauderdale, FL.
English Hills 553(3) --
- -------------
secured by apartment
complex in Tampa, FL.
Forest Ridge 311(3) --
- ------------
secured by shopping
center in Denton, TX.
Residential - various 333(3) --
- ---------------------
5 mortgages secured
by 5 homes in AZ
and HI.
JUNIOR MORTGAGE LOAN
Signature Athletic Club 1,500(2) --
- -----------------------
secured by a building
housing a health club
in Dallas, TX.
--------- ---------
5,025 $ 700
=========
Interest receivable 85
Allowance for estimated losses (1,481)
---------
$ 3,629
=========
</TABLE>
(1) The aggregate cost for federal income tax purposes is $5.1 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.
(3) These loans are pledged as additional collateral on the note payable
secured by the Amoco Building.
72
<PAGE> 73
SCHEDULE IV
(Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST
MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at January 1, ....................... $ 8,304 $ 6,366 $ 10,989
Additions
Funding of notes receivable ........... 73 2,000 --
Loans from sales of properties ........ -- 750 --
Amortization of discount .............. 74 27 39
Deductions
Collections of principal .............. 3,426 (837) (1,080)
Foreclosures .......................... -- -- (891)
Discount on payoff .................... -- -- (541)
Write off of uncollectible
mortgage notes receivable .......... -- -- (2,150)
Other ................................. -- (2) --
-------- -------- --------
Balance at December 31, ..................... $ 5,025 $ 8,304 $ 6,366
======== ======== ========
</TABLE>
73
<PAGE> 74
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 64, 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; President (April 1992 to April 1994) of PSA Group; Executive
Vice President (1987 to 1991) of Key Companies Inc.; 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").
74
<PAGE> 75
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Trustees (Continued)
RICHARD W. DOUGLAS: Age 50, Trustee (Independent) (since January 1998).
President (since 1991) of Dallas Chamber of Commerce; President (1988 to
1991) of North Texas Commission; President (1978 to 1981) of Las Colinas
Corporation and Southland Investment Properties, both affiliates of
Southland Financial Corporation; and Director (since January 1998) of IORI
and TCI.
LARRY E. HARLEY: Age 57, Trustee (Independent) (since January 1998).
President (1993 to 1997) and Executive Vice President (1992 to 1993) of
U.S. Operations, Executive Vice President (1989 to 1992) and Senior Vice
President (1986 to 1989) of Distribution Operations, Director of Marketing
(1984 to 1986), and Manager of North Central Distribution Center (1974 to
1984) of Mary Kay Cosmetics; and Director (since January 1998) of IORI and
TCI.
R. DOUGLAS LEONHARD: Age 61, Trustee (Independent) (since January
1998).
Senior Vice President (1986 to 1997) of LaCantera Development Company, a
wholly-owned subsidiary of USAA; Senior Vice President (1980 to 1985) of
The Woodlands Development Corporation; Vice President and Houston Projects
Manager (1973 to 1979) of Friendswood Development Company; Manager in
various capacities (1960 to 1973) of Exxon Corp.; and Director (since
January 1998) of IORI and TCI.
MURRAY SHAW: Age 66, Trustee (Independent) (since February 1998).
Chairman of the Board of Regents (since 1997) of Stephen F. Austin
University; Vice President (1967 to 1996) of Tracor, Inc.; and Director
(since February 1998) of IORI and TCI.
MARTIN L. WHITE: Age 58, Trustee (Independent) (since January 1995).
Chief Executive Office (since 1995) of Builders Emporium, Inc.; 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 63, Trustee (Independent) (since January 1995).
General Partner (since 1976) of Edward G. Zampa and Company; and Director
(since January 1995) of IORI and TCI.
75
<PAGE> 76
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Board Committees
The Trust's Board of Trustees held eight meetings during 1997. 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,
except for Mr. White, who attended only one of the two meetings of the Audit
Committee.
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, Leonhard and White. The Audit Committee met twice during 1997.
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 the Advisor or its affiliates. The Relationship
with Advisor Committee did not meet in 1997. 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 did
not meet in 1997.
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; Karl L. Blaha, Executive Vice President -
Commercial Asset Management; 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
[THIS SPACE INTENTIONALLY LEFT BLANK.]
76
<PAGE> 77
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Executive Officers (Continued)
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 51, 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.
KARL L. BLAHA: Age 50, Executive Vice President - Commercial Asset
Management (since July 1997).
Executive Vice President- Commercial Asset Management (since July 1997) and
Executive Vice President and Director of Commercial Management (April 1992
to August 1995) of BCM, IORI, TCI, and SAMI; Director (since June 1996),
President (since October 1993) and Executive Vice President and Director of
Commercial Management (April 1992 to October 1993) of ART; Executive Vice
President (October 1992 to July 1997) of Carmel Realty, Inc. ("Carmel
Realty"), a company owned by First Equity Properties, Inc. ("First
Equity"), which is 50% owned by BCM; President and Director (since 1996) of
First Equity; Executive Vice President and Director of Commercial
Management (April 1992 to February 1994) of NIRT and Vinland Property Trust
("VPT"); Partner - Director of National Real Estate Operations (August 1988
to March 1992) of First Winthrop Corporation; Corporate Vice President
(April 1984 to August 1988) of Southmark Corporation ("Southmark"); and
President March 1986 to August 1988) of Southmark Commercial Management.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
77
<PAGE> 78
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Executive Officers (Continued)
BRUCE A. ENDENDYK: Age 49, Executive Vice President (since January
1995).
President (since January 1995) of Carmel Realty; 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; President and Chief Executive Officer (March
1988 to January 1989) of Southmark Equities Corporation; and Vice
President/Resident Manager (December 1975 to March 1988) of Coldwell Banker
Commercial/Real Estate Services in Houston, Texas.
THOMAS A. HOLLAND: Age 55, 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 VPT; Vice President and Controller (December
1986 to June 1990) of Southmark; Vice President-Finance (January 1986 to
December 1986) of Diamond Shamrock Chemical Company; Assistant Controller
(May 1976 to January 1986) of Maxus Energy Corporation (formerly Diamond
Shamrock Corporation); Trustee (August 1989 to June 1990) of Arlington
Realty Investors; and Certified Public Accountant (since 1970).
Officers
Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust: Robert A. Waldman, Senior Vice President 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.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
78
<PAGE> 79
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Officers (Continued)
ROBERT A. WALDMAN: Age 45, 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).
DREW D. POTERA: Age 38, 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.
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 1997.
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.
79
<PAGE> 80
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
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, Blaha, 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 8, 1997, the Trust's
shareholders approved the renewal of the Trust's Advisory Agreement with BCM
through the next annual meeting of the Trust's shareholders. Subsequent renewals
of the Trust's Advisory Agreement with BCM require the approval of the Trust's
shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales and acquisitions, lending, foreclosure and
borrowing activity, and other investments, and the Advisor is required to report
quarterly to the Trust's Board of Trustees on the Trust's performance against
the business plan. In addition, all transactions or investments by the Trust
shall require prior approval by the Trust's Board of Trustees unless they are
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to the Advisor by the Trust's Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides 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
80
<PAGE> 81
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
The Advisor (Continued)
the gross asset value of the Trust (total assets less allowance for
amortization, depreciation or depletion and valuation reserves) and an annual
net income fee equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by the Trust during such fiscal year
exceeds the sum of: (i) the cost of each such property as originally recorded in
the Trust's books for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (ii) capital improvements made to such
assets during the period owned by the Trust, and (iii) all closing costs,
(including real estate commissions) incurred in the sale of such property;
provided, however, no incentive fee shall be paid unless (a) such real estate
sold in such fiscal year, in the aggregate, has produced an 8% simple annual
return on the Trust's net investment including capital improvements, calculated
over the Trust's holding period before depreciation and inclusive of operating
income and sales consideration and (b) the aggregate net operating income from
all real estate owned by the Trust for each of the prior and current fiscal
years shall be at least 5% higher in the current fiscal year than in the prior
fiscal year.
Additionally, pursuant to the Advisory Agreement, BCM or an affiliate of BCM is
to receive an acquisition commission for supervising the acquisition, purchase
or long-term lease of real estate for the Trust equal to the lesser of (i) up to
1% of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers or (ii) the compensation customarily charged in
arm's-length transactions by others rendering similar property acquisition
services as an ongoing public activity in the same geographical location and for
comparable property; provided that the aggregate purchase price of each property
(including acquisition fees and all real estate brokerage commissions) may not
exceed such property's appraised value at acquisition.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by the Trust; provided,
however, that the compensation retained by BCM or any affiliate of BCM shall not
exceed the lesser of (i) 2% of the amount of the loan committed by the Trust or
(ii) a loan brokerage and commitment fee which is reasonable and fair under the
circumstances.
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.
81
<PAGE> 82
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
The Advisor (Continued)
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 $606,000 of the annual advisory fee for 1997.
Additionally, if the Trust were to request that BCM render services to the Trust
other than those required by the Advisory Agreement, BCM or an affiliate of BCM
will be separately compensated for such additional services on terms to be
agreed upon from time to time. As discussed below, under "Property Management",
the Trust has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate
of BCM, to provide property management for the Trust's properties. Also as
discussed below, under "Real Estate Brokerage" the Trust has engaged Carmel
Realty, also an affiliate of BCM, on a non-exclusive basis, to perform brokerage
services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of the Trust.
The directors and principal officers of BCM are set forth below.
<TABLE>
<S> <C>
MICKEY N. PHILLIPS: Director
RYAN T. PHILLIPS: Director
RANDALL M. PAULSON: President
KARL L. BLAHA: Executive Vice President - Commercial Asset
Management
BRUCE A. ENDENDYK: Executive Vice President
THOMAS A. HOLLAND: Executive Vice President and Chief Financial
Officer
</TABLE>
82
<PAGE> 83
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
The Advisor (Continued)
<TABLE>
<S> <C>
A. CAL ROSSI, JR.: Executive Vice President
COOPER B. STUART: Executive Vice President
CLIFFORD C. TOWNS, JR: Executive Vice President - Finance
DAN S. ALLRED: Senior Vice President - Land Development
ROBERT A. WALDMAN: Senior Vice President, Secretary and General
Counsel
DREW D. POTERA: Vice President, Treasurer and Securities
Manager
</TABLE>
Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene E.
Phillips' son. Gene E. Phillips serves as a representative of the trust
established for the benefit of his children which owns BCM and, in such
capacity, Mr. Phillips has substantial contact with the management of BCM and
input with respect to its performance of advisory services to the Trust.
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)
First Equity, which is 50% owned by BCM, (ii) Gene E. Phillips and, (iii)
a trust for the benefit of the children of Mr. Phillips.
Real Estate Brokerage
Carmel, Ltd. subcontracts the property-level management and leasing of eighteen
of the Trust's commercial properties to Carmel Realty, which is owned by First
Equity. 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
83
<PAGE> 84
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Real Estate Brokerage (Continued)
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 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 1997, $87,000 was paid to the Independent Trustees in total Trustees'
fees for all services, including the annual fee for service during the period
January 1, 1997 through December 31, 1997, and 1997 special service fees as
follows: Ted P. Stokely, $16,500; Edward L. Tixier, $15,000; Martin L. White,
$15,000; and Edward G. Zampa, $40,500.
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, 1992 in the Trust's
shares of beneficial interest and in each of the indices and further assumes
the reinvestment of all distributions. Past performance is not necessarily an
indicator of future performance.
<TABLE>
<CAPTION>
==================================================================================================================
1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THE TRUST 100.00 216.92 263.56 265.32 344.10 483.89
- ------------------------------------------------------------------------------------------------------------------
S&P 500 INDEX 100.00 109.99 111.43 153.13 188.29 251.13
- ------------------------------------------------------------------------------------------------------------------
REIT INDEX 100.00 121.18 126.03 155.01 200.51 222.07
==================================================================================================================
</TABLE>
[THIS SPACE INTENTIONALLY LEFT BLANK.]
84
<PAGE> 85
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 6, 1998.
<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. 1,633,820 40.6%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Basic Capital Management, Inc. 574,114 14.3%
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231
</TABLE>
(1) Percentages are based upon 4,021,447 shares of beneficial interest
outstanding at March 6, 1998.
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 6, 1998.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
- -------------------------- ------------------ ----------
<S> <C> <C>
All Trustees and Executive 2,207,934 (2) 54.9%
Officers as a group
(11 individuals)
</TABLE>
- ---------------------------
(1) Percentage is based upon 4,021,447 shares of beneficial interest issued and
outstanding at March 6, 1998.
(2) Includes 1,633,820 shares owned by ART and 574,114 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.
85
<PAGE> 86
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, Blaha,
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) First Equity, which
is 50% owned by BCM, (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 eighteen of the Trust's
commercial properties to Carmel Realty, which is a company owned by
First Equity.
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 First Equity.
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, Blaha, 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 Syntek West,
Inc., 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
reorganized in bankruptcy in February 1996, and has since paid all debts as
directed by the Court.
86
<PAGE> 87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties. The
Trust's management believes that all of the related party transactions
represented the best investments available at the time and were at least as
advantageous to the Trust as could have been obtained from unrelated third
parties.
As more fully described in ITEM 2. "PROPERTIES - Real Estate," the Trust is
engaged with NIRT in the Sacramento Nine partnership and, until October 1997,
was engaged with NIRT in the Indcon, L.P. partnership.
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 officers of the Trust also serve as officers of ART. BCM, the
Trust's advisor, also serves as advisor to ART and at March 6, 1998 ART owned
approximately 40.6% of the Trust's outstanding shares of beneficial interest. At
December 31, 1997, 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, 1997, the market value of the ART
shares was $11.8 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 TCI common stock through negotiated or open market
transactions. The Trustees of the Trust serve as directors of TCI. The officers
of the Trust also serve as officers of TCI. BCM, the Trust's advisor, also
serves as advisor to TCI. At December 31, 1997, the Trust owned 79,500 shares of
TCI common stock which the Trust had purchased in open market transactions in
1990 and 1991 at a total cost to the Trust of $235,000. At December 31, 1997,
the market value of the TCI common stock was $1.3 million. See ITEM 2.
"PROPERTIES - Equity Investments in Real Estate Entities."
In 1997, the Trust paid BCM and its affiliates $2.5 million in advisory, net
income and incentive sales fees, $3.3 million in real estate brokerage
commissions, $383,000 in mortgage brokerage and equity refinancing fees, and
$1.8 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 $1.1 million in 1997.
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."
87
<PAGE> 88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
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 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."
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
"Olive 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
88
<PAGE> 89
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
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 Olive 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 Olive 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 Olive 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 Gene E. Phillips, William S. 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.
An Amendment to the Olive Modification (the "Olive Amendment") was approved by
the Court on July 3, 1997. The Olive Amendment requires that additional
requirements be met for certain transactions with affiliates ("Affiliated
Transaction"). Independent counsel to the Board must review, advise and report
to the Trust's Board of Trustees on any Affiliated Transaction prior to its
consideration and approval by the Trust's Board of Trustees and the Trust's
Board of Trustees must unanimously approve the transaction after receiving
independent counsel's advice and report. In addition, a notice must be given to
the plaintiffs' counsel at least 10 days prior to the closing of the transaction
and during such 10 day period plaintiffs' counsel is entitled to seek a Court
order prohibiting consummation of the transaction. Neither BCM nor any of its
affiliates may receive any fees or commissions in connection with an Affiliated
Transaction.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
89
<PAGE> 90
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, 1997 and 1996
Consolidated Statements of Operations -
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this report:
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- ---------------------------------------------------------------
<S> <C>
3.0 Second Amended and Restated Declaration of Trust (incorporated
by reference to the Registrant's Current Report on Form 8-K
dated August 14, 1987).
3.1 Amendment No. 1 to Second Amended and Restated Declaration of
Trust, (incorporated by reference to the Registrant's Current
Report on Form 8-K dated July 5, 1989) reporting change in name
of Trust.
</TABLE>
90
<PAGE> 91
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.
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated October 16, 1997, was
filed with respect to Item 2. "Acquisition or Disposition of
Assets," and Item 7. "Financial Statements and Exhibits,"
which reports the acquisition of Westgrove Air Plaza and
Cypresstree Apartments.
</TABLE>
91
<PAGE> 92
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 20, 1998 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
----------------------------------
Ted P. Stokely
Chairman of the Board
and Trustee
By: /s/ Richard W. Douglas By: /s/ Murray Shaw
----------------------------- ----------------------------------
Richard W. Douglas Murray Shaw
Trustee Trustee
By: /s/ Larry E. Harley By: /s/ Martin L. White
----------------------------- ----------------------------------
Larry E. Harley Martin L. White
Trustee Trustee
By: /s/ R. Douglas Leonhard By: /s/ Edward G. Zampa
----------------------------- ----------------------------------
R. Douglas Leonhard Edward G. Zampa
Trustee Trustee
Dated: March 20, 1998 By: /s/ Thomas A. Holland
-------------------------- ----------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
92
<PAGE> 93
CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ------------------------ ----
<S> <C> <C>
27.0 Financial Data Schedule. 94
</TABLE>
93
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,088
<SECURITIES> 13,042
<RECEIVABLES> 5,110
<ALLOWANCES> 1,481
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 284,836
<DEPRECIATION> 23,142
<TOTAL-ASSETS> 299,370
<CURRENT-LIABILITIES> 0
<BONDS> 199,712
0
0
<COMMON> 0
<OTHER-SE> 88,043
<TOTAL-LIABILITY-AND-EQUITY> 299,370
<SALES> 0
<TOTAL-REVENUES> 55,180
<CGS> 0
<TOTAL-COSTS> 32,041
<OTHER-EXPENSES> 6,236
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,142
<INCOME-PRETAX> 4,176
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,176
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
