<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6613
MORTGAGE AND REALTY TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 23-1862664
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8380 OLD YORK ROAD, SUITE 300 19117
ELKINS PARK, PENNSYLVANIA (Zip code)
(Address of principal
executive offices)
</TABLE>
Registrant's telephone number, including area code: 215-881-1525
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------------------- -------------------------------
<S> <C>
Common Shares, par value $1.00 per share New York Stock Exchange
Pacific Stock Exchange
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
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 the
Form 10-K. /X/
The aggregate market value of the Common Shares held by non-affiliates of
the registrant at January 11, 1994, computed by reference to the closing sale
price of such shares as reported in the Consolidated Transaction Reporting
System, was $5,595,000. The number of Common Shares outstanding at January 11,
1994 was 11,226,215. Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
Yes _X_ No ___
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Mortgage and Realty Trust (the "Trust") is a Maryland real estate investment
trust engaged in the business of managing its portfolio of mortgage loans and
real estate investments. The Trust was organized in 1970 as PNB Mortgage and
Realty Investors. In 1979, Sutro Mortgage Investment Trust combined into the
Trust. In 1984, the Trust changed its name to Mortgage and Realty Trust. The
Trust is organized under a Declaration of Trust as amended through February 17,
1993 and conducts its business in such a fashion as to qualify as a real estate
investment trust under Sections 856-860 of the Internal Revenue Code of 1986, as
amended. The Trust is currently managed by seven Trustees, each of whom is
elected annually by the Trust's shareholders at the annual meeting of
shareholders. Although the annual meeting of shareholders is customarily held in
February of each year, the Trust has determined for 1994 to delay the meeting so
that it can be held in combination with the shareholder meeting to be called to
consider any restructuring agreed upon with the holders of the Trust's Senior
Secured Uncertificated Notes due 1995 (the "Senior Notes") and thereby spare the
expense of having two shareholder meetings. The Trust has six executive
officers, two of whom are also Trustees.
PREVIOUS CHAPTER 11 PROCEEDING AND PLAN OF REORGANIZATION
On April 12, 1990, the Trust filed a voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Central District of California. The decision of the Trustees of the
Trust to file a voluntary petition for reorganization was reached following a
series of events commencing on March 12, 1990, when Standard & Poor's
Corporation downgraded the rating for the commercial paper of the Trust from A-2
to A-3. As a result of this downgrading, the Trust was unable to access the
commercial paper markets, resulting in a series of defaults under the Trust's
outstanding indebtedness.
After unsuccessfully negotiating with a group of lenders to establish a
replacement credit arrangement, the Trustees of the Trust decided on April 12,
1990, that the interests of shareholders and other parties in interest would be
better served by filing for reorganization under Chapter 11.
On November 21, 1990, a Joint Plan of Reorganization (the "1991 Plan")
proposed by the Trust, the official creditors' committee and the official equity
security holders' committee was filed with the bankruptcy court pursuant to
section 1121 of the Bankruptcy Code. The 1991 Plan was confirmed by the
bankruptcy court by an order entered February 27, 1991. The 1991 Plan was filed
as Exhibit 4.4 to the Trust's Annual Report on Form 10-K for the fiscal year
ended September 30, 1991. An amendment to the 1991 Plan effected as part of the
1992 Restructuring (discussed below) was filed as Exhibit 4.4 to the Trust's
Annual Report on Form 10-K for the fiscal year ended September 30, 1992.
The 1991 Plan provided that the holders of claims against the Trust were to
receive payments in installments over a period ending on June 30, 1995 with the
right of the Trust to defer certain principal amounts for up to 24 months, up to
December 31, 1995. Interest was payable initially at Bank of America N.T. &
S.A.'s reference rate plus one percent, increasing by 0.25% every six months,
with interest on deferred amounts at the adjusted rate plus two percent. The
1991 Plan also included numerous financial, affirmative and negative covenants,
including covenants relating to the ratio of the Trust's outstanding debt to its
capital base, the ratio of earning assets to outstanding debt and the amount of
non-earning assets, and covenants severely limiting the Trust's ability to make
new investments or to incur new indebtedness.
The forecast upon which the 1991 Plan was based assumed that the real estate
markets would begin to improve in fiscal 1992. However, notwithstanding this
forecast, the markets continued to materially deteriorate in an unforeseen
manner. Despite these conditions, the Trust was able to make all required
interest payments and to exceed the required amortization payments, reducing the
debt
1
<PAGE>
to $374,000,000 at June 30, 1991 as opposed to the requirement of $380,000,000
and to $329,000,000 at January 3, 1992 as opposed to the requirement of
$340,000,000 at December 31, 1991. These results were achieved through
liquidating Trust assets at substantial discounts from their recorded cost.
The continued deterioration of the real estate markets made it impossible
for the Trust to meet the amortization payment at June 30, 1992, which was
required to reduce the Trust's debt to $291,250,000, taking into account
deferrals permitted under the 1991 Plan. The deterioration also precluded the
Trust from being able to meet the financial covenants of the 1991 Plan. One of
these covenants was previously amended, effective September 30, 1991, with the
approval of the official creditors' committee for the period ending June 29,
1992, but the Trust felt that it would not be in compliance with such covenant
after that date.
To adjust its operations to current market conditions, by 1992 the Trust had
redirected its focus. The Trust had historically emphasized earnings growth, and
the accompanying asset acquisitions. Because of changes in the economy and the
financial and real estate markets which adversely affected the Trust's business
and asset values, management moved to an emphasis on improving cash flow in
order to meet its obligations under the 1991 Plan and then to provide an
opportunity for growth and increased shareholder value in the future when the
United States real estate markets would, eventually, stabilize and return to a
more traditional environment. Meeting the interest and principal payments
required under the 1991 Plan was one of the Trust's important objectives.
Management focused efforts on generating sufficient liquidity through active and
asset-specific management of its overall portfolio to meet those payments, while
at the same time maximizing future shareholder value. However, in light of the
impending June 30, 1992 interest and principal payments, which aggregated
approximately $44.4 million under the 1991 Plan, and the continued stagnation in
the real estate market, in late 1991 and early 1992 the Trust determined that it
was necessary to defer a portion of the principal payments of the outstanding
debt and limit certain future cash interest payments to allow sufficient time
for liquidity to return to the United States real estate markets.
As part of the ongoing effort to strengthen the Trust's capital structure,
of which the 1992 Restructuring (as defined below) was to be an important
element, the Trust also considered raising cash through structured financings
such as asset securitizations. However, the Trust was ultimately unable to
generate funds through such transactions in an efficient manner and therefore
did not pursue any such transactions.
At the end of the Trust's fiscal year ending September 30, 1991, it was
evident to the Trust that conditions in the real estate markets were continuing
to deteriorate. Commencing in the first quarter of fiscal 1992, the Trust held
discussions with its official creditors' committee to discuss a rescheduling of
the debt obligations under the 1991 Plan. Throughout the balance of the first
quarter of fiscal 1992 and during the second and third quarters of fiscal 1992,
the Trust negotiated with its official creditors' committee to develop a prudent
rescheduling of such debt. The result of these negotiations was the 1992
Restructuring.
1992 RESTRUCTURING
Pursuant to the Trust's negotiations with its official creditors' committee,
on June 15, 1992 the Trust commenced a solicitation of acceptances to certain
modifications (the "1992 Modifications") to the outstanding debt obligations of
the Trust and to a prepackaged plan of reorganization (the "Proposed 1992 Plan")
to effect the same 1992 Modifications. In order to effect the 1992 Modifications
without implementing the Proposed 1992 Plan, the Trust was required to obtain
acceptances from holders of 100% of the outstanding debt obligations. The
proposed modifications to the outstanding debt were identical under the proposed
out-of-court restructuring and the Proposed 1992 Plan. The Trust received 100%
acceptance of the 1992 Modifications and, on July 15, 1992, the Trust
successfully restructured its outstanding debt in accordance with the proposed
1992 Modifications (the "1992 Restructuring").
2
<PAGE>
Pursuant to the 1992 Restructuring, the outstanding debt was restructured in
the form of the Senior Notes. The 1992 Modifications provided, among other
things, for (i) an increase in the amounts of required principal payments which
could be deferred (while retaining the final payment date for deferred payments
at December 31, 1995), (ii) an extension of the permitted repayment period of
such deferred amounts from 24 months to 30 months from the date a deferral is
utilized, (iii) the establishment of a limit on the maximum rate of interest to
be paid in cash on a current basis at 9% through June 30, 1994, with any excess
being accrued and paid at December 31, 1995, (iv) changes in certain required
financial covenants to reflect the then-existing financial condition of the
Trust and the then-existing real estate markets, (v) with the approval of the
holders of 66 2/3% of the Senior Notes, the release of collateral for certain
financings by the Trust, provided such financings would result in the reduction
in the amount of Senior Notes, and (vi) the payment of additional consideration
to the holders of the Senior Notes equal to one percent of the principal amount
of the Senior Notes, payable in four semi-annual installments commencing on the
date the 1992 Restructuring became effective.
Pursuant to the 1992 Restructuring, the Trust entered into the Indenture
(the "Indenture") governing the Senior Notes with Wilmington Trust Company, as
trustee (the "Indenture Trustee"), entered into a second amendment to the
Trust's outstanding collateral and security agreement dated as of February 21,
1991 with the Indenture Trustee and William J. Wade as collateral agents (as
amended, the "Collateral Agreement") and amended the 1991 Plan.
CURRENT DEBT SERVICE REQUIREMENTS AND DEFAULTS AND FORECAST SHORTFALL IN
OPERATING CASH FLOW
The face amount of the Senior Notes at June 30, 1993 was $290,000,000. The
Senior Notes provide that the holders of Senior Notes will receive semi-annual
payments of principal on June 30 and December 31 of each year until June 30,
1995 when all undeferred principal is due. The Senior Note Indenture also
provides for quarterly additional payments of principal in an amount equal to
available cash (as defined in the Indenture) held by the Trust at the end of
each quarter in excess of $10 million, less certain dividend overpayments, if
any. The Trust has the right to defer certain principal payments for up to 30
months until December 31, 1995 at which time no more principal payments may be
deferred and all deferred amounts are due. The Senior Notes provide for payments
of interest quarterly on March 31, June 30, September 30 and December 31 of each
year. Interest on the Senior Notes was payable initially in 1991 at Bank of
America N.T. & S.A.'s reference rate plus one percent, increasing 0.25% every
six months. The interest rate spread over such reference rate in effect on
September 30, 1993 was 2.25%, with the next scheduled date for an increase in
the rate being January 1, 1994. Interest on deferred principal is payable at
such adjusted rate plus two percent. The Senior Note Indenture also contains
numerous financial, affirmative and negative covenants as described above.
The financial forecast upon which the 1992 Restructuring was based assumed
that the real estate markets in which the Trust holds assets would stop or slow
their decline by 1993 with some improvement in 1994. Instead, since the
effective date of the 1992 Restructuring, these markets have continued to
deteriorate. The Trust's business, including its ongoing efforts to refinance
and sell property, did not generate cash flow sufficient to service the Senior
Notes during the fiscal year ended September 30, 1993 and the Trust does not
anticipate that the business will generate cash flow sufficient to service the
Senior Notes in fiscal 1994. In any event, the Senior Notes will need to be
refinanced on or about June 30, 1995.
Because its operating income has declined due to the continued deterioration
of the real estate markets, the Trust was not able to meet its scheduled June
30, 1993 principal payment on the Senior Notes of $20,000,000, which was
required to reduce the principal amount of the Senior Notes to $270,000,000,
taking into account deferrals permitted under the Senior Note Indenture. The
Trust's failure to make the June 30 principal payment constituted an event of
default under the Senior Note Indenture. The deterioration of the real estate
markets also precluded the Trust from being able to meet certain ratios set
forth in the financial covenants of the Senior Note Indenture effective March
31, June 30, and September 30, 1993, constituting additional events of default.
Certain of these
3
<PAGE>
covenants were previously amended in or prior to the 1992 Restructuring. On May
26, 1993, the Trust received from the holders of more than 66 2/3% in principal
amount of Senior Notes a waiver relating to the March 31 financial covenant
default.
The Trust timely paid the June 30 and September 30, 1993 interest payments
of $6.8 million and $6.6 million, respectively. The Trust also paid the final
payment of the restructuring fee of $812,500 on September 30, 1993. An
additional $33.8 million in principal (taking into account permitted deferrals)
and $6.6 million in interest was due on December 31, 1993. Because the Trust did
not make otherwise required payments on June 30 and December 31, 1993, at the
end of the first quarter of 1994 (ending December 31, 1993) the Trust held
approximately $17.8 million in available cash (as defined in the Indenture).
Assuming no other payment defaults, the Trust would have been obligated to pay
the excess of such available cash over $10 million to Senior Note holders as an
additional principal payment. However, pursuant to the agreement in principle
with certain of the principal holders of Senior Notes reached in August 1993
(discussed below), the Trust agreed to pay on September 30, 1993 the interest
payment due September 30, 1993 and certain restructuring fees due December 31,
1993, but not to pay the interest or principal due December 31, 1993. Although
it presently appears unlikely that the terms of the August 1993 agreement in
principle will be implemented, consistent with the ongoing negotiations with the
principal holders of the Senior Notes, the Trust did not pay the interest or
principal due at December 31, 1993, constituting additional events of default
under the Senior Note Indenture. The Trust forecasts that it will have
continuing difficulty meeting its obligations under the Senior Note Indenture
without a substantial restructuring of such debt.
Notwithstanding the uncured events of default, neither the Indenture Trustee
nor any holders of the Senior Notes have accelerated the Senior Notes. On July
2, 1993 holders of approximately 81% of the Senior Notes agreed, subject to
certain conditions, not to accelerate the Senior Notes or take any other
remedial or enforcement action during a defined standstill period (the
"Standstill Period") initially expiring July 31, 1993. The Standstill Period was
extended by holders of more than 66 2/3% of the Senior Notes on August 3, August
20, September 23, October 5 and November 23, 1993. However, the Standstill
Period expired on December 3, 1993. At the present time, it appears unlikely
that any further extensions of the Standstill Period will be granted. Subsequent
to the expiration of the Standstill Period, on or about December 8, 1993, the
Indenture Trustee notified the Trust's bank of the Indenture Trustee's security
interest in the Trust's deposit accounts and instructed the bank to freeze the
Trust's cash until otherwise instructed by the Indenture Trustee. Since that
date, the Trust has operated on an ad hoc basis with the Indenture Trustee in
administering its cash, with all cash use subject to review and approval by the
Indenture Trustee. There can be no assurance that the Indenture Trustee will not
take further remedial or enforcement action with respect to the Trust's bank
accounts or other properties, including acceleration of the Senior Notes and
foreclosure. Such action, or the failure of the Indenture Trustee to consent to
necessary use of cash or releases of collateral in the conduct of the Trust's
business would have a material adverse effect on the Trust's operations and
could cause the Trust to seek relief under Chapter 11 of the United States
Bankruptcy Code.
Lack of liquidity for real estate has continued since the end of the Trust's
fiscal year. The Trust's operating cash flow has declined as it has been forced
to sell assets currently yielding higher returns. Approximately half of the
Trust's portfolio is in California where the general economy and the real estate
markets continue to be in recession. See "Investments" below.
NEGOTIATIONS WITH CREDITORS
During the second fiscal quarter of 1993, it became apparent to the Trust
and its financial advisors that the Trust's projected cash flow would not be
adequate to meet its obligations in the future. In February 1993 the Trust
contacted its official creditors' committee to apprise the official creditors'
committee and its advisors of the Trust's forecast difficulties. In or about
February 1993,
4
<PAGE>
the Trust and its advisors met with its official creditor's committee and its
advisors to discuss the Trust's condition and prospects. Thereafter, in March
1993, the Trust and the official creditors' committee commenced negotiations
regarding a restructuring of the Senior Notes.
Beginning with the initial formal meeting in March 1993, throughout the
period from March through August 1993, the Trust and its advisors met with the
official creditors' committee and its advisors to negotiate a restructuring. In
August 1993, the Trust and the official creditors' committee met and agreed to
the broad outlines of the economic terms of a restructuring, subject to the
approval of the Trustees of the Trust. Under the agreement in principle, the
Senior Notes would be exchanged for approximately $195 million of new senior
secured notes and common shares representing 85% of the equity of the Trust.
Thereafter, on August 18, 1993, the Trustees of the Trust approved the economic
terms of the restructuring of the Senior Notes subject to, among other things,
receipt of indications of support for the restructuring from individual members
of the official creditors' committee and other holders of the Senior Notes
reasonably sufficient to effect the restructuring pursuant to a prepackaged plan
of reorganization (typically holders of at least two-thirds in principal amount
and one half in number of claims). On August 19, 1993, the Trust announced that
it had reached a non-binding agreement in principle with the official creditors'
committee (representing approximately 43% of the Senior Notes) to restructure
the indebtedness represented by the Senior Notes.
While the Trust was negotiating with the official creditors' committee, the
Trust was also discussing possible third-party investment in the restructuring.
Although all potential third-party investors were offered an opportunity to
propose restructuring alternatives, only two such investors made proposals to
the Trust. The official creditors' committee advised the Trust that the offers
were not acceptable and they did not believe that it was in their or the Trust's
best interests in the restructuring to pursue such third-party participation. As
a result, the Trust suspended the solicitation of interested parties, and the
Trust and the official creditors' committee agreed on the internal restructuring
contained in the August 1993 agreement in principle. Commencing again in
November 1993, as the prospects for implementing the August 1993 agreement in
principle waned, the Trust resumed responding to inquiries from third parties
about participation in a restructuring of the Trust.
Commencing at about the time of the agreement in principle between the Trust
and the official creditors' committee, certain of the Senior Notes began to
trade. Interest in the trading of Senior Notes increased after announcement of
the terms of the restructuring and, by December 1993, in excess of 50% of the
principal amount of the Senior Notes had traded.
Included in the Senior Notes initially traded were all of the Senior Notes
held by two of the five members of the official creditors' committee who had
negotiated the August 1993 agreement in principle. In or about October 1993 four
of the holders who had acquired Senior Notes and who then held a significant
amount of Senior Notes signed confidentiality letters with the Trust and
requested to be named to the official creditors' committee and receive financial
and operating information relating to the Trust. The three then-remaining
members of the official creditors' committee did not grant committee membership
to the holders but acquiesced in the Trust's delivery of confidential
information to the investing holders. Subsequently, another member of the
official creditors' committee sold all of its Senior Notes, part to a member of
the official creditors' committee and the balance to other persons. That sale
left the official creditors' committee with two members, one of whom held, as a
result of secondary claims purchases, at December 31, 1993 in excess of 33 1/3%
of the Senior Notes.
In October 1993, the investing holders commenced their due diligence review
of the Trust, which included financial and other information provided by the
Trust. At the request of the investing holders, the Trust agreed to pay certain
fees and expenses of a financial advisor to the investing holders. In or about
November 1993, the investing holders retained Smith Barney Shearson Inc. ("Smith
Barney") as their financial advisor. Smith Barney immediately commenced its
analysis of the financial condition and operations of the Trust and the proposed
agreement in principle.
Because of the substantial trading in the Senior Notes and the inability of
the Trust to obtain satisfactory indications of support for the August 1993
agreement in principle from any holders of
5
<PAGE>
Senior Notes, any action to implement the Trust's original agreed restructuring
has been postponed. The Trust's management is continuing discussions with the
principal holders of the Senior Notes and their representatives to explore
various alternatives for restructuring the Senior Notes. If agreement on such a
restructing cannot be reached, or if the holders of Secured Notes or the Trustee
take action or fail to cooperate with the Trust in such a manner that the
business or operations of the Trust are jeopardized, the Trust will consider
other alternatives, including the filing of a voluntary bankruptcy petition
under Chapter 11 of the United States Bankruptcy Code.
INVESTMENTS
Although the Trust has continued to fund previously existing investment
commitments and to fund limited tenant improvements and similar investments
necessary to retain or obtain tenants, the Trust has not made any new
investments since its Chapter 11 filing, but it has continued to manage its
investment portfolio. The Trust's future investment strategy cannot be
formulated until the Trust's debt restructuring terms are finalized. The Trust's
investments include short and intermediate-term construction and standing loans,
long-term participating loans and investments in real estate.
Loans may be secured by first or junior mortgages as well as mortgages
secured by leaseholds. Loans made by the Trust are secured by mortgages on
income-producing properties, including office buildings, shopping centers,
industrial projects, apartments and condominium projects. When the Trust made
investments, it abided by various restrictions consisting principally of
loan-to-value ratios, investment ranges and percentage of total assets invested
in loans to a single borrower.
The Trust's investments are primarily located in major metropolitan areas
throughout the United States. As of September 30, 1993, the Trust held
investments in mortgage loans, investments in real estate and other interests in
real properties located in 21 states.
Total loans and investment commitments outstanding at September 30, 1993
were $349,637,000 of which $1,632,000 remained to be disbursed.
The following pages contain summaries of the Trust's commitments and
investments at September 30, 1993 and certain information pertaining to
non-earning loans, delinquent earning loans, non-earning in-substance
foreclosures and non-earning foreclosed properties.
6
<PAGE>
MORTGAGE AND REALTY TRUST
SUMMARY OF INVESTMENTS AT SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
AMOUNT
AMOUNT COMMITTED OUTSTANDING
---------------- ----------------
<S> <C> <C>
TYPE OF INVESTMENTS
SHORT AND INTERMEDIATE-TERM
Mortgage Loans:
Construction Loans........................................................ $ 3,250,000 $ 3,250,000
Standing loans............................................................ 77,923,000 76,937,000
Non-Earning............................................................... 5,445,000 5,244,000
Properties Acquired Through Foreclosure and Held for Sale:
Earning................................................................... 52,586,000 52,586,000
Non-earning............................................................... 36,134,000 36,134,000
In-Substance Foreclosures:
Earning................................................................... 70,487,000 70,050,000
Non-earning............................................................... 17,559,000 17,559,000
---------------- ----------------
Total Short and Intermediate-Term....................................... 263,384,000 261,760,000
---------------- ----------------
LONG-TERM
Participating Loans:
Construction Phase........................................................ 2,010,000 2,010,000
Participating Phase....................................................... 12,468,000 12,460,000
---------------- ----------------
Total Participating..................................................... 14,478,000 14,470,000
Amortizing Loans............................................................ 4,731,000 4,731,000
Investment in Real Estate Equities.......................................... 57,213,000 57,213,000
Investment in Partnerships.................................................. 9,831,000 9,831,000
---------------- ----------------
Total Long-Term......................................................... 86,253,000 86,245,000
---------------- ----------------
Total Invested Assets....................................................... $ 349,637,000 348,005,000
----------------
----------------
Less Deferred Fees........................................................ (879,000)
----------------
Total Invested Assets....................................................... $ 347,126,000
----------------
----------------
</TABLE>
MORTGAGE AND REALTY TRUST
NON-EARNING LOANS, NON-EARNING IN-SUBSTANCE FORECLOSURES
AND NON-EARNING FORECLOSED PROPERTY HELD FOR SALE
(BY GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE)
SEPTEMBER 30, 1993
(000 OMITTED)
<TABLE>
<CAPTION>
RETAIL INDUSTRIAL OFFICE
CENTER CENTER BUILDING TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
California......................................................... $ 8,093 $ 10,319 $ 6,907 $ 25,319
Colorado........................................................... 1,037 -- -- 1,037
Massachusetts...................................................... 3,646 2,773 1,047 7,466
New Hampshire...................................................... -- 4,760 -- 4,760
New Jersey......................................................... -- 3,217 2,061 5,278
Pennsylvania....................................................... -- 7,512 7,432 14,944
--------- --------- --------- ---------
$ 12,776 $ 28,581 $ 17,447 $ 58,804
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
7
<PAGE>
MORTGAGE AND REALTY TRUST
GEOGRAPHIC DISTRIBUTION OF INVESTMENTS BY COMMITTED AMOUNTS
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
RETAIL RESEARCH &
STATE APARTMENTS HOTEL INDUSTRIAL OFFICE RESIDENTIAL BUILDINGS DEVELOPMENT TOTALS
- --------------------- ----------- ---------- ------------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona.............. $ 7,134,479 $ 7,134,479
California........... $ 283,161 51,135,801 $21,730,249 $ 99,641 $66,105,625 $23,928,030 163,282,507
Colorado............. 808,295 99,329 1,271,525 2,179,149
Delaware............. 275,646 275,646
Florida.............. 28,472 4,610,249 4,638,721
Georgia.............. 91,150 91,150
Indiana.............. 4,300,000 4,300,000
Maine................ 7,797,007 7,797,007
Maryland............. 9,383,955 967,692 10,351,647
Massachusetts........ 5,483,230 5,313,882 3,645,482 14,442,594
Michigan............. 6,686,000 6,686,000
Minnesota............ 2,243,411 2,878,991 5,122,402
Missouri............. 8,995,320 8,995,320
Nevada............... $3,060,000 3,060,000
New Hampshire........ 4,760,035 1,394,259 6,154,294
New Jersey........... 5,277,664 5,277,664
Oregon............... 6,841,763 6,841,763
Pennsylvania......... 1,838,753 29,318,268 21,563,503 20,041,711 15,022,867 87,785,102
Texas................ 310,057 310,057
Virginia............. 278,893 278,893
Washington........... 4,633,272 4,633,272
----------- ---------- ------------- ----------- ---------- ----------- ------------ -------------
Totals............... $30,708,536 $3,060,000 $ 105,018,553 $70,111,016 $1,840,823 $92,458,602 $46,440,137 $ 349,637,667
----------- ---------- ------------- ----------- ---------- ----------- ------------ -------------
----------- ---------- ------------- ----------- ---------- ----------- ------------ -------------
Percentage........... 8.78% 0.88% 30.04% 20.05% 0.53% 26.44% 13.28%
----------- ---------- ------------- ----------- ---------- ----------- ------------
----------- ---------- ------------- ----------- ---------- ----------- ------------
<CAPTION>
STATE %
- --------------------- ----------
<S> <C>
Arizona.............. 2.04%
California........... 46.70%
Colorado............. 0.62%
Delaware............. 0.08%
Florida.............. 1.33%
Georgia.............. 0.03%
Indiana.............. 1.23%
Maine................ 2.23%
Maryland............. 2.96%
Massachusetts........ 4.13%
Michigan............. 1.91%
Minnesota............ 1.47%
Missouri............. 2.57%
Nevada............... 0.87%
New Hampshire........ 1.76%
New Jersey........... 1.51%
Oregon............... 1.96%
Pennsylvania......... 25.11%
Texas................ 0.09%
Virginia............. 0.08%
Washington........... 1.32%
----------
Totals...............
Percentage........... 100.00 %
----------
----------
</TABLE>
NON-EARNING INVESTMENTS, DELINQUENT EARNING LOANS AND FORECLOSED PROPERTIES
EARNING MORTGAGE LOANS MORE THAN 60 DAYS DELINQUENT -- The Trust generally
considers loans as delinquent if payment of interest and/or principal, as
required by the term of the note, is more than 60 days past due. At September
30, 1993, there were no loans which were so delinquent as to principal and/or
interest.
NON-EARNING MORTGAGE LOANS -- At September 30, 1993, there was one loan of
$5,244,000 classified as non-earning. A description is as follows:
(1) The Trust has a first mortgage loan on 12 industrial buildings
containing 130,969 square feet located in Chino, California. This loan
was placed on non-earning status in June 1992. The occupancy level is
currently 91%.
NON-EARNING IN-SUBSTANCE FORECLOSURES -- A loan is considered an
in-substance foreclosure if (1) the debtor has little or no equity considering
the fair value of the collateral, (2) proceeds for the repayment can be expected
to come only from operation or sale of the collateral, and (3) the debtor has
either formally or effectively abandoned control of the collateral. At September
30, 1993, there were five loans classified as non-earning in-substance
foreclosed which totalled $17,559,000. Descriptions of the five investments are
as follows:
(1) The Trust has a second mortgage loan on a warehouse building containing
115,196 square feet located in Boston, Massachusetts. The loan was placed
on non-earning status and reclassified as non-earning in-substance
foreclosed in March 1991. The property is currently 44% leased and
occupied.
8
<PAGE>
(2) The Trust has a first mortgage loan on an industrial building containing
139,500 square feet located in Chester County, Pennsylvania. The loan was
placed on non-earning status and was reclassified as non-earning
in-substance foreclosed in September 1991. The project is currently 100%
leased and occupied.
(3) The Trust has a first mortgage loan on a warehouse/distribution building
containing 104,531 square feet located in Chino, California. The loan was
placed on non-earning status and was reclassified as non-earning
in-substance foreclosed in June 1993. The project is currently 100%
leased and occupied.
(4) The Trust has a first mortgage loan on six 2 and 3 story office
buildings containing 108,693 square feet located in Blue Bell,
Pennsylvania. The loan was placed on non-earning status and was
reclassified as non-earning in-substance foreclosed in June 1993. The
project is currently 77% leased and occupied.
(5) The Trust has a first mortgage loan on a shopping center containing
97,394 square feet located in Napa, California. The project was placed on
non-earning status in June 1993 and reclassified as non-earning
in-substance foreclosed in September 1993. The project is currently 72%
leased and occupied. This loan was paid off in December 1993.
NON-EARNING PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE -- At
September 30, 1993, there were eleven non-earning properties acquired through
foreclosure and held for sale which totalled $36,134,000. Descriptions of the
eleven investments are as follows:
(1) The Trust had a first mortgage loan on a 26,976 square foot multi-level
retail center located in Denver, Colorado. The Trust acquired title to
this property in February 1986. The property was sold for $1.4 million in
November 1993.
(2) The Trust had a first mortgage loan on an office/warehouse building
containing 119,000 square feet located in Hopkinton, Massachusetts. The
Trust acquired title to this property in January 1991. The project is
currently unleased.
(3) The Trust had a first mortgage loan on a retail shopping center
containing 111,339 square feet located in Fairhaven, Massachusetts. The
Trust acquired title to this property in April 1991. The project is
currently 30% leased and occupied.
(4) The Trust had a first mortgage loan on a 3-story office building
containing 37,800 square feet located in Piscataway, New Jersey. The
Trust acquired title to this property in August 1991. The project is
currently 78% leased and occupied.
(5) The Trust had first and second mortgage loans on two office/industrial
buildings containing 91,710 square feet and a 33,600 square foot
warehouse building located in Salem, New Hampshire. The Trust acquired
title to this property in August 1992. The project is currently 25%
leased and occupied.
(6) The Trust had a first mortgage loan on a manufacturing/warehouse
building containing 251,090 square feet located in Moreno Valley,
California. The Trust acquired title to this property in November 1992.
The Trust is in the process of finalizing a lease to one tenant who is
anticipated to be taking occupancy in early 1994.
(7) The Trust had a first mortgage loan on a 4-story office building
containing 99,666 square feet located in Cherry Hill, New Jersey. The
Trust acquired title to this property in November 1992. The project is
currently 48% leased and occupied.
(8) The Trust had a first mortgage loan on an industrial building containing
120,000 square feet located in Willow Grove, Pennsylvania. The Trust
acquired title to this property in June 1993. The project is currently
unleased.
9
<PAGE>
(9) The Trust had a first mortgage loan on an industrial building containing
124,928 square feet located in Chino, California. The Trust acquired
title to this property in June 1993. The project is currently unleased.
The property was sold for $2.9 million in December 1993.
(10) The Trust had a first mortgage loan on a two-story office building
containing 30,000 square feet located in Sudbury, Massachusetts. The
Trust acquired title to this property in June 1993. The project is
currently 26% leased and occupied.
(11) The Trust had a first mortgage loan on a retail shopping center
containing 75,593 square feet located in Sacramento, California. The
Trust acquired title to this property in September 1993. The project is
currently 83% leased and occupied.
ADDITIONAL NON-EARNING LOANS AS OF DECEMBER 1, 1993 -- At December 1, 1993,
there was one additional loan of $4,300,000 classified as non-earning.
ALLOWANCE FOR LOSSES
An allowance for losses is maintained based upon the Trustees' evaluation of
the Trust's investments. A review of all investments is made quarterly to
determine the adequacy of the allowance for losses. During the Trust's fiscal
year ended September 30, 1993, there were additions of $37,000,000 to the
allowance for losses and there were charges of $44,545,000 against the
allowance. The amount of the allowance for losses at September 30, 1993 was
$11,808,000 (3.4% of the Trust's invested assets). For a description of the
Trust's method of determining the allowance for losses, see Notes 1 and 3 of
Notes to the Financial Statements.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES WITH THE TRUST
- -------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Victor H. Schlesinger 68 Chairman and Trustee
C. W. Strong, Jr. 64 President, Chief Executive Officer and Trustee
James A. Dalton 50 Executive Vice President and Chief Operating Officer
Daniel F. Hennessey 52 Treasurer and Chief Financial Officer
Donald W. Burnes, Jr. 44 Senior Vice President
Douglas R. Eckard 47 Senior Vice President
</TABLE>
The officers of the Trust serve a one-year term of office and are elected to
their positions each year by the Trustees at the annual organization meeting of
Trustees which immediately follows the annual meeting of shareholders. All of
the foregoing were last elected as officers at such meeting on February 10,
1993, with Mr. Eckard being promoted from Vice President to Senior Vice
President on August 17, 1993. Messrs. Schlesinger, Strong and Hennessey have
served as officers of the Trust for more than the past five years. Messrs.
Dalton and Eckard were first elected as officers of the Trust on September 20,
1989 in connection with the Trust becoming self-administered. Mr. Burnes was
first elected as an officer of the Trust on February 14, 1990. From 1982 to
1989, Mr. Dalton was the President of GMAC Realty Advisors. From 1984 to 1989,
Mr. Eckard was a Vice President of GMAC Realty Advisors. GMAC Realty Advisors
advised the Trust prior to its becoming a self-administered REIT in 1989. From
1981 to August 1989 Mr. Burnes was a Senior Vice President of Heller Financial
Incorporated. From August 1989 to December 1989 Mr. Burnes was a Vice President
at Sun State Savings in Arizona.
ITEM 2. PROPERTIES.
The Trust does not own any real property for use in connection with its
day-to-day operations. Office space for the Trust's principal office at 8380 Old
York Road, Suite 300, Elkins Park, Pennsylvania is leased for a three-year term
ending August 31, 1995. The Trust's only other office, located at 3500 West
Olive Avenue, Suite 600, Burbank, California, is leased for a five-year term
ending October 31, 1995. The total rental expense for the fiscal year ended
September 30, 1993 for both
10
<PAGE>
properties was $341,000. The Trust has become, and may from time to time become,
the owner or lessor of real estate in connection with its investment and lender
activities. See Item 1, "Business -- Investments."
ITEM 3. LEGAL PROCEEDINGS.
The consolidated class and derivative actions pending in the United States
District Court for the Eastern District of Pennsylvania filed in March 1990
against certain of the Trust's present and former Trustees and officers and the
Class 5 claims against the Trust remaining in the Chapter 11 proceeding in the
United States Bankruptcy Court for the Central District of California were
settled effective September 17, 1993. The class actions and claims alleged
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and negligent misrepresentation under the common law by
reason of misleading statements in the Trust's reports filed with the SEC and
other information disseminated to the public. The derivative action alleged
mismanagement on the part of the Trustees which resulted in the bankruptcy.
Under the terms of the settlement: (1) the Trust contributed 150,000 Common
Shares to the settlement of the class claims; (2) the director and officer
liability insurance carrier contributed $860,000 on behalf of the individual
defendants in the class actions; and (3) the insurance carrier paid on behalf of
the individual defendants in the derivative action $65,000 to counsel for the
derivative plaintiffs. The settlement was approved by both courts after notice
to the class members and the shareholders of the Trust.
As described above, the Trust made no cash payments in connection with the
settlement. While the Trust and the individual defendants continue to believe
that their actions were entirely proper and violated no laws, the Trustees
decided to settle the claims in order to avoid additional legal expense and the
diversion of management's time and energy at a time when the operations of the
Trust demanded their undivided attention.
A discussion of events surrounding the Trust's bankruptcy filing and an
explanation of the material terms of the Trust's reorganization under the 1991
Plan are set forth in the section entitled "Previous Chapter 11 Proceeding and
the 1991 Plan" under Item 1 above. Notwithstanding the confirmation of the 1991
Plan, the bankruptcy court continues to have jurisdiction to, among other
things, resolve disputes that may arise under the 1991 Plan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS.
(a) MARKET PRICE AND DIVIDENDS
The Trust's Common Shares are listed for trading on the New York Stock
Exchange and the Pacific Stock Exchange under the symbol MRT. The following
table shows the high and low sales prices for each fiscal quarter during the
past two years and dividends declared attributable to such quarters:
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
--------- --------- -------------
<S> <C> <C> <C>
1993
First Quarter.................................................... $ 1 3/8 $ 7/8 $ -0-
Second Quarter................................................... 2 1/2 1 1/4 -0-
Third Quarter.................................................... 1 7/8 3/8 -0-
Fourth Quarter................................................... 7/8 3/8 -0-
1992
First Quarter.................................................... $ 2 1/4 $ 1 1/4 $ -0-
Second Quarter................................................... 2 7/8 1 5/8 -0-
Third Quarter.................................................... 2 1/2 1 5/8 -0-
Fourth Quarter................................................... 2 1 -0-
</TABLE>
The Trust incurred net operating losses for tax purposes in fiscal 1991,
1992 and 1993, all of which will be available as a loss carryforward to future
years' taxable income. (See Note 1 of Notes to the Financial Statements --
"Income Taxes" regarding limitation of net operating losses.)
(b) HOLDERS OF COMMON SHARES
There were approximately 5,744 record holders of the Trust's Common Shares
at December 31, 1993.
(c) The Trust did not declare or pay any dividends during the fiscal year
ended September 30, 1993 or the fiscal year ended September 30, 1992. In
addition, the Indenture governing the Senior Notes prohibits the Trust from
paying any dividends to shareholders other than dividends required for the Trust
to maintain its REIT status and inadvertent overpayments of such dividends.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
MORTGAGE AND REALTY TRUST
SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Total income..................... $ 38,342,000 $ 42,009,000 $ 56,253,000 $ 68,233,000 $ 65,559,000
Interest and administrative
expenses........................ 49,467,000 46,547,000 54,798,000 49,992,000 43,363,000
Income (loss) before provision
for losses, reorganization
expenses and gain on sales of
real estate..................... (11,125,000) (4,538,000) 1,455,000 18,241,000 22,196,000
Provision for losses............. 37,000,000 32,000,000 33,000,000 23,790,000 2,250,000
Reorganization expenses, net..... 5,844,000 934,000 4,352,000 5,051,000 --
Gain on sale of real estate...... -- -- 244,000 244,000 --
Net income (loss)................ (53,969,000) (37,472,000) (35,653,000) (10,356,000) 19,946,000
PER SHARE DATA
Net income (loss)................ $(4.87) $(3.38) $ (3.22) $ (.94) $ 1.85
Dividends declared (1)........... -0- -0- -0- .45 2.00
Book value....................... 3.71 8.63 12.01 15.23 17.16
BALANCE SHEET DATA
Total assets..................... $ 353,874,000 $ 427,268,000 $ 514,754,000 $ 595,640,000 $ 517,442,000
Invested assets.................. 347,126,000 424,394,000 505,600,000 547,480,000 507,212,000
Allowance for losses............. 11,808,000 19,353,000 14,707,000 10,792,000 2,876,000
Senior Notes..................... 290,000,000 312,000,000 374,000,000 403,884,000 --
Notes payable.................... -- -- -- -- 321,614,000
Loan on equity investment........ 17,572,000 15,515,000 -- -- --
Shareholders' equity............. 41,623,000 95,592,000 133,064,000 168,717,000 187,562,000
Debt/equity ratio (2)............ 7.15:1 3.30:1 2.70:1 2.21:1 1.73:1
<FN>
- ------------------------
(1) Dividends shown are those attributable to earnings for the period
indicated.
(2) Includes interest payable and is reduced by cash and cash equivalents.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES -- A Plan of Reorganization under Chapter 11
of the Bankruptcy Code was confirmed at a hearing held in the Bankruptcy Court
in Los Angeles, California, on February 21, 1991, and an order was entered
February 27, 1991, confirming the Plan. As a result of the liquidity problems in
the commercial real estate markets, the Trust was not able to meet the required
amortization at June 30, 1992 and the debt was restructured in July 1992 with
the unanimous consent of the creditors. The debt is now governed by an indenture
dated as of July 15, 1992. At December 31, 1992, debt outstanding was reduced to
$290 million, the maximum debt level permitted under the Plan on that date.
Due to continued lack of liquidity in the real estate marketplace, the Trust
did not have sufficient funds to meet its $20 million required principal payment
due June 30, 1993. The Trust has, however,
13
<PAGE>
paid all of the interest and fees due through September 30, 1993 on its
outstanding debt. See Item 1, "Business" for additional information regarding
certain other required payments not made subsequent to June 30, 1993 and other
events of default.
Under the financial covenants of the Indenture governing the Senior Notes,
the Trust was required to maintain a ratio of outstanding securities to its
capital base (as defined in the Indenture) of 515% at March 31, 1993. In
addition, under the Indenture the Trust was required to maintain a ratio of
outstanding securities to its capital base of 438% and a ratio of earning assets
to outstanding securities of 113% at June 30, 1993 and September 30, 1993. The
Trust failed to meet each of these ratios, constituting events of default under
the Indenture. However, on May 26, 1993, the Trust received from the holders of
more than 66-2/3% in principal amount of Senior Notes a waiver relating to the
March 31 default.
Management is continuing discussions with the representatives of the
creditors to explore various alternatives for restructuring the outstanding debt
obligations. The Trust's present intention is to reach a consensual
restructuring agreement. If such an agreement cannot be reached with the Trust's
debt holders, the Trust will have to consider other alternatives, including the
filing of a voluntary bankruptcy petition under Chapter 11 of the United States
Bankruptcy Code. The holders of more than 66-2/3% of the Trust's debt securities
had agreed with the Trust to temporarily forebear further creditor action on the
defaults for a period that expired on December 3, 1993. At the present time, it
appears unlikely that a further extension of the standstill will be granted. The
Trust intends, therefore, to continue to operate its business and seek Senior
Note holder consent on an ad hoc basis as such consent is required. Although the
Trust believes that such consents, if requested, would be in the best interest
of Mortgage and Realty Trust, its shareholders and the Senior Note holders,
there can be no assurance that the Trust will obtain sufficient consents as they
are required. If it becomes impossible for the Trust to continue operations
under such circumstances, it may be necessary for Mortgage and Realty Trust to
explore other alternatives, including seeking relief under Chapter 11.
At September 30, 1993, the Trust had cash and cash equivalents of $11.5
million. Included in cash and cash equivalents are $1.3 million of restricted
cash which represents the funding of the employee retention plan and $1.5
million related to borrowers' deposits. The Trust's unfunded loan commitments
totalled $1.6 million at September 30, 1993. Under the Plan, the Trust has been
permitted to fund its existing contractual obligations, but may not make new
investments. See Item 1, "Business" for additional information regarding the
enforcement of the Indenture Trustee's security interest in the deposit accounts
of the Trust and the Trust's obligation to pay the excess of available cash (as
defined in the Indenture) over $10 million to Senior Note holders.
RESULTS OF OPERATIONS -- The Trust reported a net loss for fiscal 1993 of
$54.0 million or $4.87 per share compared to a net loss of $37.5 million or
$3.38 per share for fiscal 1992 and a net loss of $35.7 million or $3.22 per
share for fiscal 1991. The 1993 loss includes a provision for losses of $37
million or $3.34 per share and net expense for reorganization and debt
restructuring items of $5.8 million or $.53 per share compared to a provision
for losses of $32 million or $2.89 per share and net expense for reorganization
and debt restructuring items of $934,000 or $.08 per share for the 1992 loss and
a provision for losses of $33 million or $2.98 per share and net expense for
reorganization and debt restructuring items of $4.4 million or $.40 per share
for the 1991 loss.
Interest and fee income on mortgage loans was $19.0 million for fiscal 1993
compared to $26.2 million in fiscal 1992. The decrease results primarily from a
reduction in average earning mortgage loans which decreased from $286.9 million
in 1992 to $197.6 in 1993. The decrease in average earning mortgage loans was
due to (a) repayment of earning mortgage loans (net of advances) of $24.0
million and (b) transfer of $110.2 million of mortgage loans to in-substance
foreclosure, foreclosed properties and investment in partnerships. Interest
income decreased from $41.9 million in fiscal 1991 to $26.2 million in fiscal
1992. The decrease resulted primarily from repayment of earning mortgage loans
and transfer of mortgage loans to in-substance foreclosure and foreclosed
properties.
14
<PAGE>
Rental income was $19.0 million for fiscal 1993 compared to $15.0 million in
fiscal 1992 and $13.5 million in fiscal 1991. Operating expenses and
depreciation and amortization on rental properties increased to $15.7 million
for fiscal 1993 compared to $12.3 million for fiscal 1992 and $11.4 million for
fiscal 1991. The increases in income and expenses on rental properties results
from continued growth in real estate equities and properties acquired through
foreclosure and held for sale.
For fiscal 1993, 1992 and 1991, additional interest and fee income from
participating mortgage loans was $30,000, $26,000 and $29,000, respectively,
which was generated from participating in gross income produced by the
properties securing these loans.
Interest expense decreased from $37.3 million in 1991 and $29 million in
1992 to $28.5 million in 1993 as a result of a decrease in average borrowings
which went from $391.1 million in 1991 and $336.4 million in 1992 to $293.2
million in 1993. Offsetting the decrease, the average interest rate increased
from 9.51% in fiscal 1991 and 8.34% in fiscal 1992 to 9.23% in fiscal 1993. At
September 30, 1993, the blended interest rate on the Senior Notes was 9.87%,
composed of interest at 9.25% on $200 million of Senior Notes (including default
interest at 1%) and 11.25% on $90 million of deferred amounts of Senior Notes
(including default interest at 1%). The entire unamortized cost of restructuring
of the Senior Notes was charged off during fiscal 1993 as a result of the
monetary default. The Trust expensed $3.4 million in fiscal 1993, of which $2.4
million related to the acceleration of costs due to the June 1993 monetary
default. Prior to the default, these costs were being amortized using the
interest method over the term of the debt.
Other operating expenses were $5.3 million for both fiscal 1993 and 1992.
Other operating expenses decreased to $5.3 million for the fiscal year ended
September 30, 1992 from $6.2 million at September 30, 1991 due to decreases in
professional fees and expenses and administrative expenses.
Reorganization expenses related to the Chapter 11 filing and debt
restructuring expenses were $5.8 million for the fiscal year ended September 30,
1993, which reflects professional fees incurred by the Creditors' Committee, the
Shareholders' Committee and the Trust, as well as restructuring fees related to
the 1992 restructuring. Reorganization expenses were $934,000 for the fiscal
year ended September 30, 1992, which reflects professional fees and
restructuring fees related to the 1992 restructuring. Reorganization expenses
were $4.4 million for the fiscal year ended September 30, 1991, which reflects
$5.8 million of professional fees incurred, offset by interest income of $1.4
million on accumulated cash.
A $37 million provision for losses was established in the current fiscal
year compared to a provision of $32 million in 1992. A $33 million provision for
losses was established in fiscal 1991. Continued deterioration in many real
estate markets during the past years, the continuing liquidity crisis in the
real estate industry and the Trust's requirement to generate cash and liquidate
investments have contributed to the establishment of the large provision for
losses based on the Trust's regular analysis of the portfolio. The Trustees
believe the allowance for losses to be adequate at September 30, 1993. The
Trustees review the investment portfolio quarterly using current estimates and
assumptions to determine the adequacy of the allowance for losses. The estimates
and assumptions used in the valuation process are subject to changes which may
be material.
Non-earning loans (including non-earning in-substance foreclosures) and
non-earning properties acquired through foreclosure and held for sale were $58.8
million at September 30, 1993 compared to $76.3 million at September 30, 1992
and $77.4 million at September 30, 1991.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are as set forth in the
"Index to Financial Statements" on page 25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
15
<PAGE>
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following biographical information is furnished as to each of the
current Trustees of the Trust.
<TABLE>
<CAPTION>
POSITIONS
NAME, AGE AND YEAR WITH THE
FIRST BECAME TRUSTEE TRUST PRINCIPAL OCCUPATIONS AND OTHER DIRECTORSHIPS (1)(2)
- ------------------------- ------------- ------------------------------------------------------------------------
<S> <C> <C>
Victor H. Schlesinger Chairman, Chairman of the Trust (February 1991-Present); President and Chief
68 years Trustee Executive Officer (1971-1989), Chairman (1980-1970 1990), GMAC Mortgage
1970 Corporation and predecessor companies.
C. W. Strong, Jr. President, President and Chief Executive Officer of the Trust.
64 years Trustee
1984
Jeffrey M. Bucher Trustee Of Counsel, Bryan Cave, Attorneys (January 1993-Present); Partner,
60 years Pepper, Hamilton & Scheetz, Attorneys (February 1990-December 1992);
1979 Partner, Lillick & McHose, Attorneys (July 1987-February 1990).
Kent L. Colwell Trustee President of Transamerica Realty Services, Inc.; Vice President -- Real
62 years Estate Services of Transamerica Corporation.
1986
James M. Gassaway Trustee Retired; Director of Strawbridge & Clothier.
71 years
1971
John E. Krout Trustee Retired; Director of Germantown Savings Bank (1971-April 1992).
73 years
1970
Gerhard N. Rostvold Trustee Economist, Urbanomics Research Associates; Consultant to business,
74 years industry and government.
1979
<FN>
- ------------------------
(1) Included are only directorships in companies registered pursuant to
Section 12 or subject to the requirements of Section 15(d) of the
Securities Exchange Act of 1934 and in financial institutions and
insurance companies. Several of such persons also hold directorships in
various charitable and non-profit organizations not shown above.
(2) Mr. Schlesinger was Vice Chairman and Mr. Strong was President of the
Trust on April 12, 1990 when the Trust filed its voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code.
</TABLE>
For information required under this item with respect to executive officers
of the Trust, see "Executive Officers of the Registrant" under Item 1 above.
ITEM 11. TRUSTEE AND EXECUTIVE COMPENSATION.
COMPENSATION OF NON-OFFICER TRUSTEES
During the fiscal year ended September 30, 1993, the Trustees, other than
Messrs. Strong and Schlesinger, received as compensation for their services as
Trustees an annual retainer of $10,000 plus $800 for each Trustee meeting
attended and $600 for each committee meeting attended (or $400 for any Trustee
or committee meeting convened by telephone conference), provided that no
additional compensation was paid for attendance at any committee meeting held on
the same day as any Trustee meeting. An additional $100 fee was payable per
meeting to the chairman of any committee.
16
<PAGE>
On September 20, 1989, the Trustees adopted the Pension Plan for Trustees,
effective October 1, 1989. Trustees become eligible for plan benefits upon
completion of five years of service as Trustee, including years served prior to
the plan's effective date. Under the plan, each eligible Trustee will be
entitled to a normal retirement benefit equal to the annual retainer for
Trustees at the rate in effect on the Trustee's normal retirement date or, if
earlier, the Trustee's last day of board membership. For purposes of this plan,
normal retirement date is the first day of the month following the Trustee's
75th birthday. Plan benefits will generally begin on the normal retirement date,
but eligible former Trustees may elect to have reduced payments commence up to
five years earlier. The reduction will be 10 percent for each year by which
commencement precedes the normal retirement date. Plan benefits will be paid for
a period equal to the number of years served as Trustee after January 1, 1980,
except that payments will cease upon the death of the Trustee. No other death
benefits shall become payable on behalf of any Trustee under the plan.
The following table sets forth, for the fiscal years ended September 30,
1993, 1992 and 1991, the compensation paid by the Trust to its chief executive
officer and its four next most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------
AWARDS
-------------------- PAYOUTS
ANNUAL COMPENSATION (1) RESTRICTED -------
-------------------------------------------------------- STOCK LTIP ALL OTHER
NAME AND SALARY BONUS OTHER ANNUAL AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION FISCAL YEAR ($)(2) ($) COMPENSATION ($) ($) SARS (#) ($) ($)(3)(4)
- ----------------------- ----------- ----------- ---------- ---------------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C.W. Strong, Jr., 1993 $175,000 -- -- -- -- -- $ 3,000
President and Chief 1992 250,000 -- -- -- 25,000 --
1991 Executive Officer 1991 250,000 -- -- -- -- --
Victor H Schlesinger, 1993 $100,000 -- -- -- -- --
Chairman 1992 27,500(5) -- -- -- 23,500 --
1991 25,850(5) -- -- -- -- --
James A. Dalton, 1993 $181,104 $20,000(6) -- -- -- -- $ 3,000
Executive Vice 1992 177,511 90,000(7) -- -- 25,000 --
President and Chief 1991 167,280 -- -- -- 40,000 --
Operating Officer
Daniel F. Hennessey, 1993 $124,508 $20,000(6) -- -- -- -- $ 3,000
Treasurer and Chief 1992 122,038 65,000(7) -- -- 20,000 --
Financial Officer 1991 115,005 -- -- -- 30,000 --
Donald W. Burnes, 1993 $114,448 $30,000(6) -- -- -- -- $ 3,000
Senior Vice 1992 113,114 65,000(7) -- -- 15,000 --
President 1991 105,765 -- -- -- 20,000 --
<FN>
- ------------------------------
(1) In the fiscal year ended September 30, 1993, the Trust provided certain
personal benefits to its executive officers. The amount of such benefits
to each of the named individuals did not exceed the lesser of $50,000 or
10% of salary and bonus for such fiscal year.
(2) Includes salary deferrals and employee contributions to the Trust's
Savings Incentive Plan.
(3) Pursuant to the transitional provisions of the SEC's executive
compensation rules, information with respect to fiscal 1992 and fiscal
1991 is excluded.
(4) Includes the Trust's matching contributions under the Trust's Savings
Incentive Plan. See "Savings Incentive Plan" below.
(5) Represents fees received as Chairman and Trustee.
(6) Does not include bonus for calendar 1993 which was paid in December 1993.
The bonuses were: for Mr. Dalton $25,000; for Mr. Hennessey $20,000; and
for Mr. Burnes $30,000.
(7) Includes retention bonus of $75,000, $50,000 and $35,000 for Messrs.
Dalton, Hennessey and Burnes, respectively.
</TABLE>
17
<PAGE>
The following table sets forth aggregate option exercises during the fiscal
year ended September 30, 1993 and option values for the chief executive officer
and the four next most highly compensated executive officers as of September 30,
1993.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED SEPTEMBER 30, 1993
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
---------------- -------------
SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------- ------------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
C.W. Strong, Jr. -- -- 34,000/-0- 0/0
Victor H. Schlesinger -- -- 29,500/-0- 0/0
James A. Dalton -- -- 34,000/40,000 0/0
Daniel F. Hennessey -- -- 27,500/30,000 0/0
Donald W. Burnes -- -- 15,000/20,000 0/0
</TABLE>
EMPLOYEES' RETIREMENT PLAN
On September 20, 1989, the Trustees adopted an Employees' Retirement Plan
effective September 30, 1989. On December 16, 1992, the Trustees amended and
restated the Employees' Retirement Plan effective January 1, 1992 (as amended,
the "Retirement Plan"). The Retirement Plan continues the benefits provided to
employees of the Trust who were formerly employees of GMAC Realty Advisors, Inc.
All other employees are eligible to participate in the Retirement Plan provided
that they are at least 21 years of age and have been employed for twelve
consecutive months, during which period the employee has completed at least 1000
hours of service. Under the Retirement Plan, each eligible employee after
completing five years of vesting service becomes 100% vested and entitled to a
retirement pension. Benefits are paid as an annual retirement income for life
equal to the greater of (a) the sum of (i) 1.3% of the highest five-year average
annual base salary, multiplied by the number of years of credited service up to
and including 35 thereof and (ii) 0.4% of the highest five-year average annual
base salary in excess of Social Security covered compensation (as adjusted every
five years), multiplied by the number of years of credited service up to and
including thereof or (b) the sum of (i) 1.3% of the highest five-year average
annual base salary, multiplied by the number of credited service up to and
including 15 thereof; (ii) 1.5% of the highest five-year average annual base
salary, multiplied by the number of years of credited service from 16 to 25
years inclusive; (iii) 0.5% of the highest five-year average annual base salary,
multiplied by the number of years of credited service from 26 to 35 years
inclusive; and (iv) 0.4% of the highest five-year average annual base salary in
excess of Social Security covered compensation (as adjusted every five years),
multiplied by the number of years of credited service up to and including 25
thereof.
Unreduced retirement benefits may begin to be paid at normal retirement (age
65 and five years of participation in the Retirement Plan), late retirement, or
five years prior to Social Security retirement age with 20 years of service.
The table below shows the estimated annual benefits payable upon retirement
under the Trust's Retirement Plan. Retirement benefits shown are based upon
retirement at age 65 and the payment of a straight life annuity to the employee.
The annual benefit under the Retirement Plan shall not exceed the lesser of
$112,221 or 100% of the participant's average compensation for three consecutive
Fiscal Years (as defined in the Retirement Plan) in which such eligible employee
is an active participant in the Retirement Plan.
18
<PAGE>
PENSION PLAN TABLE
ESTIMATED ANNUAL RETIREMENT BENEFIT
<TABLE>
<CAPTION>
Average of 5
Highest Annual Years of Service
Compensation ---------------------------------------------------------
Levels 15 20 25 30 35
- -------------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 29,427 $ 40,486 $ 51,545 $ 58,854 $ 68,663
150,000 35,802 49,236 62,670 71,604 83,538
175,000 42,177 57,986 73,795 84,354 98,413
200,000 48,552 66,736 84,920 97,104 113,288
225,000 54,927 75,486 96,045 109,854 128,163
</TABLE>
For the fiscal year ended September 30, 1993, the base salary for purposes
of the Retirement Plan for the executive officers named in the Summary
Compensation Table is set forth in the salary column of the Summary Compensation
Table. Officers named in the Summary Compensation Table have been credited with
years of service under the Retirement Plan as follows: Mr. Dalton, 11 years; Mr.
Hennessey, 22 years; Mr. Burnes, 4 years. Mr. Schlesinger and Mr. Strong do not
participate in the Retirement Plan.
The benefits listed in the Pension Plan Table are not subject to reduction
for Social Security or other offset amounts.
SAVINGS INCENTIVE PLAN
On September 20, 1989, the Trustees adopted a Savings Incentive Plan
effective September 30, 1989, to provide retirement benefits for eligible
employees of the Trust. On December 16, 1992, the Trustees amended and restated
the Savings Incentive Plan effective January 1, 1992 (as amended, the "Savings
Plan"). The Savings Plan continues the benefits provided under the GMAC Mortgage
Corporation Savings Incentive Plan to employees of the Trust who were formerly
employees of the Adviser. All other employees of the Trust are eligible to
participate in the Savings Plan provided that they have been employed for twelve
consecutive months, during which period the employee has completed at least
1,000 hours of service. Under the Savings Plan, each eligible employee may
authorize payroll deductions not less than 1% nor more than 15% of the
employee's earnings before bonus income, not to exceed the dollar limit
permissible under the Code ($8,994 in 1993). The Trust will match each
employee's contribution for the payroll period, subject to a limitation of 6% of
the employee's compensation for the payroll period, with the maximum amount of
contribution by the Trust in any year being $3,000.
Benefits will be paid to terminating participants as soon as possible
following the participant's date of termination. Participants have a 100%
nonforfeitable right to their contributions to the Savings Plan and the Trust's
matching contributions vest at the rate of 20% for each year of service, but
will, in any event, be 100% vested at the later of age 65 or after five years of
participation in the Savings Plan, or in the event of disability or death.
Subject to certain limitations, hardship distributions of a participant's fully
vested account balance are permitted on account of a demonstrable, immediate and
heavy financial need.
EMPLOYEE RETENTION PLAN
The Trustees have adopted an Employee Retention Plan (the "Retention Plan"),
dated October 17, 1990, as amended January 16, 1991 and March 20, 1991, designed
to provide a financial incentive for key employees to successfully restructure
the organization and maximize the net worth of the Trust. The Retention Plan was
approved by the Bankruptcy Court by order dated February 26, 1991.
19
<PAGE>
The Retention Plan is administered by the Compensation and Nominating
Committee which determines the allocation of amounts among the participants. All
full-time employees of the Trust except the Chairman and the President and Chief
Executive Officer are eligible to participate in the Retention Plan.
The first portion of the Retention Plan provides for a termination pay plan
which will remain in effect during the period that the Class 3 Creditor
Obligations (as defined in the 1991 Plan, and as amended, the Senior Notes) are
outstanding. Any employee who is terminated without cause during this period
shall be entitled to termination pay of not less than three and not more than 18
months salary depending on the employee's years of employment and position with
the Trust. The number of months salary for Messrs. Dalton, Hennessey and Burnes
are 18, 18 and 12, respectively. Medical and dental coverage will be continued
during the termination pay period. An employee who is terminated for cause,
voluntarily leaves, dies or becomes disabled during the plan period will not be
entitled to benefits under this plan. The benefits which may be payable under
this plan have been funded in a separate trust.
The second portion of the Retention Plan included a retention bonus plan
which provided for the aggregate payment of up to $350,000 to employees who
remained in the employ of the Trust until February 27, 1992, a period of one
year from the date of the confirmation of the Plan of Reorganization. A separate
trust was funded for the payment of these benefits.
The third portion of the Retention Plan provided for the grant under the
Trust 1984 Share Option Plan of non-qualified stock options for up to an
aggregate of 200,000 Shares of the Trust to participants. On March 29, 1991,
options for 197,500 shares were granted at an exercise price of $4.15 per share
which was the greater of (i) the average of the closing price of the Trust's
Shares on the New York Stock Exchange for the last five days of the 30 day
period after the effective date of the 1991 Plan and (ii) the fair market value
of the Shares on the date of grant. Options will not vest to employees until
three years after the date of grant and any employee who leaves voluntarily or
is discharged for cause during the three year period will forfeit his or her
rights under the option. After vesting, options can be exercised any time up to
five years from the date of grant except that an employee with a vested option
who leaves the employ of the Trust must exercise within a three month period
after resignation. If a change in control of the Trust occurs, all options which
have not previously been forfeited will vest immediately.
The final portion of the Retention Plan is an incentive program which may
provide total incentive payments during the period the Class 3 Creditor
Obligations (Senior Notes) are outstanding of not more than $1,250,000. For
calendar year 1991, the program was based on an incentive pool calculated as
follows: At June 30, 1991, if the Class 3 Creditor Obligations (Senior Notes)
were no greater than $380,000,000 (the maximum amount allowed under the 1991
Plan without any deferrals), $75,000 would be deposited in the pool with an
added $5,000 for each full $1,000,000 that the Class 3 Creditor Obligations
(Senior Notes) were reduced before that amount. There was eliminated from this
calculation voluntary repayments by the Trust which reduced cash on hand below
$15,000,000. As a result, $95,000 was deposited in the pool. At December 31,
1991, if the Class 3 Creditor Obligations (Senior Notes) were no greater than
$340,000,000, $125,000 would be deposited in the pool with an added $5,000 for
each full $1,000,000 that the Class 3 Creditor Obligations (Senior Notes) are
below that amount after deducting any amounts credited at June 30, 1991. As a
result, $125,000 was deposited in the pool. On September 16, 1992, the
Compensation and Nominating Committee approved a continuation of the incentive
program for calendar year 1993 based on a similar formula for reducing the
outstanding Senior Notes. Under this incentive program, because the Senior Notes
were no greater than $290,000,000 at December 31, 1992, $125,000 was deposited
in the pool. The amounts paid from the pool to the named executive officers for
the fiscal years ended September 30, 1993, 1992 and 1991 are included in the
Summary Compensation Table. The form and amount of this program for future years
will be at the discretion of the Compensation and Nominating Committee.
20
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Bucher, Colwell, Gassaway, Krout and Rostvold served as members of
the Trust's Compensation and Nominating Committee during the Trust's fiscal year
ended September 30, 1993. None of such individuals was, during such fiscal year,
an officer or employee of the Trust, was formerly an officer of the Trust or had
any relationship requiring disclosure by the Trust under Item 404 of Regulation
S-K promulgated under the Securities Exchange Act of 1934.
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
Under the Employee Retention Plan, Messrs. Dalton, Hennessey and Burnes are
entitled to termination pay equal to 18, 18 and 12 months salary, respectively,
if they are terminated without cause during the period that the Class 3 Creditor
Obligations (as defined in the Plan of Reorganization, as amended) are
outstanding. In addition, all options granted to such individuals under the
Employee Retention Plan that have not otherwise vested will vest automatically
upon the occurrence of a change-in-control of the Trust. See "Employee Retention
Plan."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of December 10, 1993, to the Trust's knowledge, no person or group (as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934)
owned beneficially 5% or more of the Common Shares of the Trust (the "Shares").
The table below sets forth the number of Shares beneficially owned: by each
Trustee; by each executive officer named in the summary compensation table; and
by the Trustees and officers as a group as of December 10, 1993. As of such
date, no individual Trustee or officer had beneficial ownership of 1% or more of
the outstanding Shares and all Trustees and officers as a group beneficially
owned 2.6% of the outstanding Shares. Except as indicated by footnote, the
Trustees and named executive officers have sole voting and investment power with
respect to any Shares beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP AT
DECEMBER 10, 1993
-------------------
<S> <C>
Victor H. Schlesinger.............................................................. 38,038(1)
C. W. Strong, Jr................................................................... 38,914(2)
Jeffrey M. Bucher.................................................................. 12,600(3)
Kent L. Colwell.................................................................... 15,650(3)(4)
James M. Gassaway.................................................................. 17,302(3)
John E. Krout...................................................................... 12,612(3)
Gerhard N. Rostvold................................................................ 14,648(3)
James A. Dalton.................................................................... 40,880(2)(5)
Daniel F. Hennessey................................................................ 28,069(6)
Donald W. Burnes, Jr............................................................... 15,000(7)
All Trustees and officers as a group (21 persons).................................. 297,538(8)
<FN>
- ------------------------
(1) 29,500 of the Shares reported as beneficially owned by Mr. Schlesinger are
obtainable upon exercise of options.
(2) 34,000 of the Shares reported as beneficially owned by each of Mr. Strong
and Mr. Dalton are obtainable upon exercise of options.
(3) 11,500 of the Shares reported as beneficially owned by each of Messrs.
Bucher, Colwell, Gassaway, Krout and Rostvold are obtainable upon exercise
of options.
(4) 3,500 of the Shares reported as beneficially owned by Mr. Colwell are held
in a family trust of which Mr. Colwell and his wife are co-trustees.
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
(5) 450 of the Shares reported as beneficially owned by Mr. Dalton are owned
by Mr. Dalton's wife and 2,054 of the Shares reported as beneficially
owned by Mr. Dalton are held in a trust for the benefit of his children.
Mr. Dalton and his wife are co-trustees of the trust.
(6) 27,500 of the Shares reported as beneficially owned by Mr. Hennessey are
obtainable upon exercise of options.
(7) All of the Shares reported as beneficially owned by Mr. Burnes are
obtainable upon exercise of options.
(8) Includes 203,504 Shares reported as beneficially owned by Trustees and
executive officers as described in the footnotes above and 51,000 Shares
obtainable upon exercise of options by officers of the Trust who are not
named in the foregoing table.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS A PART OF THE REPORT.
The following documents are filed as part of this report.
1. Financial Statements.
The financial statements of the Trust are set forth in the "INDEX TO
FINANCIAL STATEMENTS" on page 25.
2. Financial Statement Schedules.
3. Exhibits.
(a) Exhibits are as set forth in the "INDEX TO EXHIBITS" on pages 47-48.
(b) REPORTS ON FORM 8-K. On July 13, 1993, August 30, 1993 and on
September 28, 1993, the Registrant filed current reports on Form 8-K regarding
the failure to make a scheduled debt payment, an agreement in principle with an
official committee of holders of Senior Notes, and extensions of standstill
arrangements.
(c) EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE. Exhibits are set
forth in the "INDEX TO EXHIBITS" on pages 47-48. Where so indicated by footnote
in the index, exhibits which were previously filed are incorporated by
reference. For exhibits incorporated by reference, the location of the exhibit
in the previous filing is indicated in parentheses. Copies of the exhibits are
available to Shareholders upon payment of $.25 per page fee to cover the Trust's
expenses in furnishing the exhibits. For copies contact: Mortgage and Realty
Trust, 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19117.
(d) Financial Statement Schedules, except those indicated in the "INDEX TO
FINANCIAL STATEMENTS" on page 25, have been omitted because the required
information is included in the financial statements or notes thereto, or the
amounts are not significant.
23
<PAGE>
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.
MORTGAGE AND REALTY TRUST
<TABLE>
<S> <C>
Date: January 10, 1994 By: /s/C. W. STRONG, JR.
C. W. Strong, Jr.
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Victor H.
Schlesinger, Chairman of Mortgage and Realty Trust, and each of them, his true
and lawful attorney-in-fact, in his name, place and stead to execute and cause
to be filed with the Securities and Exchange Commission any or all amendments to
this report.
<TABLE>
<C> <S> <C>
/s/ VICTOR H. SCHLESINGER
Victor H. Schlesinger Chairman and Trustee January 10, 1994
President, Chief Executive
/s/ C. W. STRONG, JR. Officer and Trustee January 10, 1994
C. W. Strong, Jr. (Principal Executive Officer)
Treasurer, Chief Financial
/s/ DANIEL F. HENNESSEY Officer (Principal Financial January 10, 1994
Daniel F. Hennessey and Accounting Officer)
/s/ JEFFREY M. BUCHER
Jeffrey M. Bucher Trustee January 10, 1994
/s/ KENT L. COLWELL
Kent L. Colwell Trustee January 10, 1994
/s/ JAMES W. GASSAWAY
James W. Gassaway Trustee January 10, 1994
John E. Krout Trustee , 1994
/s/ GERHARD N. ROSTVOLD
Gerhard N. Rostvold Trustee January 10, 1994
</TABLE>
24
<PAGE>
MORTGAGE AND REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. 26
Financial Statements
Statement of Operations (Years ended September 30, 1993, 1992, 1991)..................................... 27
Balance Sheet (September 30, 1993 and 1992).............................................................. 28
Statement of Cash Flows (Years ended September 30, 1993, 1992 and 1991).................................. 29
Statement of Shareholders' Equity (Years ended September 30, 1993, 1992 and 1991)........................ 30
Notes to the Financial Statements........................................................................ 31
Financial Statement Schedules
Schedule XI -- Mortgage Loans on Real Estate (September 30, 1993)...................................... 42
Schedule XII -- Real Estate Accumulated Appreciation (September 30, 1993).............................. 45
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Trustees and Shareholders
Mortgage and Realty Trust
We have audited the accompanying balance sheets of Mortgage and Realty Trust
at September 30, 1993 and 1992, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1993. Our audits also included the financial statement
schedules referenced at Item 14(a). 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mortgage and Realty Trust at
September 30, 1993 and 1992, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1993, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
aspects the information set forth therein.
The accompanying financial statements and schedules have been prepared
assuming that Mortgage and Realty Trust will continue as a going concern. As
more fully described in Note 1, the Trust was not able to comply with certain
financial covenants related to the Restructured Joint Plan of Reorganization
dated July 15, 1992. In addition, the Trust was not able to generate sufficient
cash flow from normal operations and could not further liquidate mortgage loans
and real estate investments in order to meet scheduled amortization on its
Senior Notes. These uncertainties raise substantial doubt about the Trust's
ability to continue as a going concern. The financial statements and schedules
do not include any adjustments to reflect the possible future effects on the
classification, realization or amounts of assets or liabilities that may result
from the outcome of these uncertainties.
ERNST & YOUNG
Philadelphia, Pennsylvania
January 3, 1994
26
<PAGE>
STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1993 1992 1991
--------------- --------------- ---------------
<S> <C> <C> <C>
Income:
Interest and fee income on mortgage loans................... $ 18,997,000 $ 26,235,000 $ 41,890,000
Additional interest and fee income on participating mortgage
loans...................................................... 30,000 26,000 29,000
Rental income............................................... 18,969,000 14,998,000 13,482,000
Interest on short-term investments.......................... 237,000 537,000 659,000
Other....................................................... 109,000 213,000 193,000
--------------- --------------- ---------------
38,342,000 42,009,000 56,253,000
--------------- --------------- ---------------
Expenses:
Interest.................................................... 28,510,000 28,956,000 37,266,000
Expenses of rental properties:
Depreciation and amortization............................. 5,500,000 4,470,000 3,062,000
Operating................................................. 10,199,000 7,808,000 8,314,000
Other operating expenses.................................... 5,258,000 5,313,000 6,156,000
Provision for losses on mortgage loans and related
investments................................................ 37,000,000 32,000,000 33,000,000
--------------- --------------- ---------------
86,467,000 78,547,000 87,798,000
--------------- --------------- ---------------
Loss before reorganization items.............................. (48,125,000) (36,538,000) (31,545,000)
Reorganization items:
Interest earned on accumulated cash......................... -- -- 1,455,000
Professional fees........................................... (5,844,000) (934,000) (5,807,000)
--------------- --------------- ---------------
(5,844,000) (934,000) (4,352,000)
--------------- --------------- ---------------
Loss before gain on sale of real estate....................... (53,969,000) (37,472,000) (35,897,000)
Gain on sale of real estate................................... -- -- 244,000
--------------- --------------- ---------------
Net loss...................................................... $ (53,969,000) $ (37,472,000) $ (35,653,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
Per Share:
Loss before gain on sale of real estate..................... $(4.87) $(3.38) $(3.24)
Gain on sale of real estate................................. -- -- .02
--------------- --------------- ---------------
Net loss...................................................... $(4.87) $(3.38) $(3.22)
--------------- --------------- ---------------
Weighted average number of common shares outstanding.......... 11,080,000 11,076,000 11,076,000
</TABLE>
See accompanying notes.
27
<PAGE>
BALANCE SHEET
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1993 1992
---------------- ----------------
<S> <C> <C>
ASSETS:
Mortgage loans and investments:
Construction loans.......................................................... $ 5,203,000 $ 10,551,000
Standing loans.............................................................. 76,871,000 177,251,000
Participating loans and investments......................................... 4,731,000 5,387,000
Non-earning mortgage loans.................................................. 12,180,000 43,698,000
5,208,000 541,000
---------------- ----------------
104,193,000 237,428,000
In-substance foreclosures:
Earning..................................................................... 69,707,000 --
Non-earning................................................................. 17,462,000 50,019,000
Real estate:
Investments in real estate equities......................................... 57,213,000 57,142,000
Properties acquired through foreclosure and held for sale:
Earning................................................................... 52,586,000 54,049,000
Non-earning............................................................... 36,134,000 25,756,000
Investment in partnerships.................................................. 9,831,000 --
---------------- ----------------
347,126,000 424,394,000
Less allowance for losses............................................... (11,808,000) (19,353,000)
---------------- ----------------
335,318,000 405,041,000
Cash and cash equivalents..................................................... 11,451,000 12,453,000
Interest receivable and other assets.......................................... 7,105,000 9,774,000
---------------- ----------------
$ 353,874,000 $ 427,268,000
---------------- ----------------
---------------- ----------------
LIABILITIES:
Senior Secured Notes.......................................................... $ 290,000,000 $ 312,000,000
Loan on equity investment..................................................... 17,572,000 15,515,000
Accounts payable and accrued expenses......................................... 4,679,000 4,161,000
---------------- ----------------
312,251,000 331,676,000
---------------- ----------------
SHAREHOLDERS' EQUITY:
Preferred shares, $1 par value: 3,500,000 shares authorized, none issued...... -- --
Common shares, $1 par value: 20,000,000 shares authorized, 11,226,000 shares
issued and outstanding (11,076,000 -- 1992).................................. 11,226,000 11,076,000
Additional paid-in capital.................................................... 182,375,000 182,525,000
Accumulated Deficit........................................................... (151,978,000) (98,009,000)
---------------- ----------------
Total shareholders' equity.............................................. 41,623,000 95,592,000
---------------- ----------------
$ 353,874,000 $ 427,268,000
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes.
28
<PAGE>
STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1993 1992 1991
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (53,969,000) $ (37,472,000) $ (35,653,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization on real estate............. 5,500,000 4,470,000 3,062,000
Provision for losses..................................... 37,000,000 32,000,000 33,000,000
Increase (decrease) in payables and accrued expenses..... 518,000 (3,529,000) (15,354,000)
Decrease (increase) in receivables and other assets...... 2,669,000 (641,000) 3,468,000
Net change in interest reserves, deferred income......... (934,000) (426,000) (9,471,000)
Gain on sale of real estate.............................. -- -- (244,000)
Other.................................................... -- 366,000 67,000
---------------- --------------- ---------------
Total adjustments.......................................... 44,753,000 32,240,000 14,528,000
---------------- --------------- ---------------
Net cash used in operating activities........................ (9,216,000) (5,232,000) (21,125,000)
---------------- --------------- ---------------
Cash flows from investing activities:
Investments in real estate:
Properties acquired through foreclose.................... (4,600,000) (4,148,000) (3,246,000)
In-substance foreclosures................................ (1,135,000) (2,203,000) (3,002,000)
Real estate equities..................................... (2,505,000) (3,227,000) (999,000)
Advances on mortgage loans............................... (602,000) (2,624,000) (26,335,000)
Partnerships............................................. (2,078,000) -- (809,000)
Principal repayments on mortgage loans..................... 24,604,000 50,674,000 45,853,000
Sale of partnership investment............................. -- -- 371,000
Sale of foreclosed property................................ 16,170,000 16,982,000 1,621,000
Repayment of
in-substance foreclosure.................................. 360,000 4,309,000 --
Sale of equity investment.................................. -- 5,194,000 5,927,000
---------------- --------------- ---------------
Net cash provided by investing activities.................... 30,214,000 64,957,000 19,381,000
---------------- --------------- ---------------
Cash flows from financing activities:
Payment of Senior Notes.................................... (22,000,000) (62,000,000) (29,884,000)
---------------- --------------- ---------------
Net cash used in financing activities........................ (22,000,000) (62,000,000) (29,884,000)
---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents......... (1,002,000) (2,275,000) (31,628,000)
Cash and cash equivalents at beginning of year............... 12,453,000 14,728,000 46,356,000
---------------- --------------- ---------------
Cash and cash equivalents at end of year..................... $ 11,451,000 $ 12,453,000 $ 14,728,000
---------------- --------------- ---------------
---------------- --------------- ---------------
Supplemental schedule of non-cash investing and financing
activities:
Transfer of real estate to mortgage loans.................. $ 348,000 $ 940,000 $ 3,060,000
Transfer of mortgage loans to real estate and in-substance
foreclosure............................................... $ 105,863,000 $ 56,554,000 $ 73,479,000
Charge-offs against allowance for losses................... $ 44,545,000 $ 27,354,000 $ 29,085,000
Transfer of investment in partnership to investment in real
estate equities........................................... $ -- $ 7,241,000 $ --
Transfer of mortgage loans and in-substance foreclosures to
investment in partnerships................................ $ 5,605,000 $ -- $ --
</TABLE>
See accompanying notes.
29
<PAGE>
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL TOTAL
----------------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1990....................... 11,076,000 $ 11,076,000 $ 182,525,000 $ (24,884,000) $ 168,717,000
Net loss.................... (35,653,000) (35,653,000)
------------- -------------- ---------------- ---------------- ----------------
Balance at September 30,
1991....................... 11,076,000 11,076,000 182,525,000 (60,537,000) 133,064,000
Net loss.................... (37,472,000) (37,472,000)
------------- -------------- ---------------- ---------------- ----------------
Balance at September 30,
1992....................... 11,076,000 11,076,000 182,525,000 (98,009,000) 95,592,000
Shares issued -- Litigation
Settlement................. 150,000 150,000 (150,000) --
Net loss.................... (53,969,000) (53,969,000)
------------- -------------- ---------------- ---------------- ----------------
Balance at September 30,
1993....................... 11,226,000 $ 11,226,000 $ 182,375,000 $ (151,978,000) $ 41,623,000
------------- -------------- ---------------- ---------------- ----------------
------------- -------------- ---------------- ---------------- ----------------
</TABLE>
See accompanying notes.
30
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION AND PLAN OF REORGANIZATION
On April 12, 1990, Mortgage and Realty Trust (the "Trust") filed for
reorganization under Chapter 11 of the U. S. Bankruptcy Code. On February 27,
1991, the United States Bankruptcy Court for the Central District of California
entered an order confirming the Trust's Plan of Reorganization (the "1991
Plan"). As a result of the liquidity problems in the commercial real estate
markets, the Trust was not able to meet the required amortization at June 30,
1992 and the debt was restructured in July 1992 with the unanimous consent of
the creditors. The debt is now governed by an Indenture dated as of July 15,
1992 between the Trust and Wilmington Trust Company (the "Indenture Trustee")
and the debt is denominated as the Trust's Senior Secured Uncertificated Notes
due 1995 (the "Senior Notes").
At September 30, 1992 the Trust's debt obligation under the Indenture
aggregated $312 million. The Senior Notes are secured by all properties and
interests in properties of the Trust. At December 31, 1992, the principal
balance of the Senior Notes was reduced to $290 million, the maximum debt level
permitted under the Indenture at that date, and remains at that amount at
September 30, 1993.
Under the financial covenants of the Indenture governing the Senior Notes,
the Trust was required to maintain a ratio of outstanding indenture securities
to its capital base (as defined in the Indenture) of 515% at March 31, 1993. In
addition, under the Indenture the Trust was required to maintain a ratio of
outstanding securities to its capital base of 438% and a ratio of earning assets
to outstanding securities of 113% at June 30, 1993 and September 30, 1993. The
Trust failed to meet each of these ratios, constituting events of default under
the Indenture. However, on May 26, 1993, the Trust received from the holders of
more than 66-2/3% in principal amount of Senior Notes a waiver relating to the
March 31 default.
Due to continued lack of liquidity in the real estate marketplace, the Trust
did not have sufficient funds to meet its $20 million required principal payment
due June 30, 1993. However, the Trust timely paid the June 30 and September 30,
1993 interest payments of $6.8 million and $6.6 million, respectively. The Trust
also paid the final payment of the restructuring fee of $812,500 on September
30, 1993. An additional $33.8 million in principal (taking into account
permitted deferrals) and $6.6 million in interest was due on December 31, 1993.
Because the Trust did not make otherwise required payments on June 30 and
December 31, 1993, at the end of the first quarter of 1994 (ending December 31,
1993) the Trust held approximately $17.8 million in available cash (as defined
in the Indenture). Assuming no other payment defaults, the Trust would have been
obligated to pay the excess of such available cash over $10 million to Senior
Note holders as an additional principal payment. However, pursuant to the
agreement in principle with certain of the principal holders of Senior Notes
reached in August 1993, the Trust agreed to pay on September 30, 1993 the
interest payment due September 30, 1993 and certain restructuring fees due
December 31, 1993, but not to pay the interest or principal due December 31,
1993. Although it presently appears unlikely that the terms of the August 1993
agreement in principle will be implemented, consistent with the ongoing
negotiations with the principal holders of the Senior Notes, the Trust did not
pay the interest or principal due at December 31, 1993, constituting additional
events of default under the Senior Note Indenture. The Trust forecasts that it
will have continuing difficulty meeting its obligations under the Senior Note
Indenture without a substantial restructuring of such debt.
Notwithstanding the uncured events of default, neither the Indenture Trustee
nor any holders of the Senior Notes have accelerated the Senior Notes. On July
2, 1993 holders of approximately 81% of the Senior Notes agreed, subject to
certain conditions, not to accelerate the Senior Notes or take any other
remedial or enforcement action during a defined standstill period (the
"Standstill Period") initially expiring July 31, 1993. The Standstill Period was
extended by holders of more than 66 2/3% of the Senior Notes on August 3, August
20, September 23, October 5 and November 23, 1993. However,
31
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Standstill Period expired on December 3, 1993. At the present time, it
appears unlikely that any further extensions of the Standstill Period will be
granted. Subsequent to the expiration of the Standstill Period, on or about
December 8, 1993, the Indenture Trustee notified the Trust's bank of the
Indenture Trustee's security interest in the Trust's deposit accounts and
instructed the bank to freeze the Trust's cash until otherwise instructed by the
Indenture Trustee. Since that date, the Trust has operated on an ad hoc basis
with the Indenture Trustee in administering its cash, with all cash use subject
to review and approval by the Indenture Trustee. There can be no assurance that
the Indenture Trustee will not take further remedial or enforcement action with
respect to the Trust's bank accounts or other properties, including acceleration
of the Senior Notes and foreclosure. Such action, or the failure of the
Indenture Trustee to consent to necessary use of cash or releases of collateral
in the conduct of the Trust's business would have a material adverse effect on
the Trust's operations and could cause the Trust to seek relief under Chapter 11
of the United States Bankruptcy Code.
Management is continuing discussions with the representatives of the
creditors to explore various alternatives for restructuring the Senior Notes.
The Trust's present intention is to reach a consensual restructuring agreement.
If such an agreement cannot be reached with the Senior Note holders, the Trust
will have to consider other alternatives, including the filing of a voluntary
bankruptcy petition under Chapter 11 of the United States Bankruptcy Code.
The financial statements have been prepared in accordance with generally
accepted accounting principles (GAAP) applicable to a company on a "going
concern" basis, which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. These financial statements
include adjustments and reclassifications that have been made to reflect
indebtedness as extended under the 1991 Plan and the Senior Note Indenture.
These financial statements do not include any adjustments that would be required
should the Trust be unable to continue as a going concern. The conditions noted
above raise substantial doubt about the Trust's ability to continue as a going
concern.
ADOPTION OF AUTHORITATIVE STATEMENTS
In fiscal 1993, the Trust adopted Statement of Financial Accounting
Standards No. 107, "Disclosure About Fair Value of Financial Instruments" ("SFAS
107"). This statement requires disclosure of the fair value of all financial
instruments, both assets and liabilities recognized and not recognized in the
balance sheet. The adoption of SFAS 107 resulted only in additional disclosure
requirements and had no effect on the Trust's financial position or results of
operations.
Also in fiscal 1993, the Trust adopted The American Institute of Certified
Public Accountants' Statement of Position 92-3, "Accounting for Foreclosed
Assets" ("SOP 92-3"). SOP 92-3 requires foreclosed assets held for sale to be
carried at the lower of (a) fair value less estimated costs to sell or (b) cost.
Fair value was determined by discounting expected cash flows using a
risk-adjusted discount rate. Prior to adopting SOP 92-3, the Trust carried its
foreclosed assets held for sale at the lower of (a) net realizable value or (b)
cost. Net realizable value was determined using the Trust's cost of funds rate.
See also Note 1, "Allowance for Losses."
RECLASSIFICATION OF PRIOR PERIODS
Certain amounts in prior year statements have been reclassified to conform
with the current year presentation.
INCOME TAXES
The Trust is a real estate investment trust that has elected to be taxed
under Sections 856-860 of the Internal Revenue Code of 1986, as amended.
Accordingly, no provision has been made for income taxes in the financial
statements.
32
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the fiscal years ended September 30, 1993, 1992 and 1991, there were
significant differences between taxable net loss and net loss as reported in the
financial statements. The differences were primarily temporary differences
related to the recognition of bad debt deductions and accounting for
reorganization costs. For financial accounting purposes, these items are
expensed currently, while for tax purposes some portion of these items may be
deferred to future periods.
The Trust incurred net operating losses of $31 million and $12 million for
tax purposes in fiscal 1992 and 1991, respectively. The Trust estimates a net
operating loss of approximately $38 million in fiscal 1993. These net operating
losses will be available for fifteen years as a loss carryforward to future
years' taxable income. The Trust's goal is to preserve its net operating losses,
but the transfer of more than 50% of the ownership of the Trust to its creditors
in a reorganization (as was provided in the August 1993 agreement in principle
and as is likely in any alternate restructuring) will limit the future use of
its net operating losses under Internal Revenue Code Section 382.
INTEREST INCOME
Interest income on each loan is recorded as earned. Interest income is not
recognized if, in the opinion of the Trustees, collection is doubtful. The Trust
generally considers loans as delinquent if payment of interest and/or principal,
as required by the terms of the note, is more than 60 days past due. At this
point, accrual of interest income is generally terminated and foreclosure
proceedings are started.
LOAN FEE INCOME
Loan fees are recorded as income using the "interest method". Accordingly,
loan fees are deferred when received and are recorded as income over the term of
the loan in relation to outstanding loan balances.
ALLOWANCE FOR LOSSES
The allowance for losses on mortgage loans and related investments is
determined in accordance with the AICPA Statement of Position on Accounting
Practices of Real Estate Investment Trusts 75-2, as amended. This statement
requires adjustment of the carrying value of mortgage loans to the lower of
their carrying value or estimated net realizable value. Estimated net realizable
value is the estimated selling price of a property offered for sale in the open
market allowing a reasonable time to find a buyer, reduced by the estimated cost
to complete and hold the property (including the estimated cost of capital), net
of estimated cash income. The cost of capital was computed at 9.0% at September
30, 1993 and 7.0% at September 30, 1992. Additional provisions for losses on
mortgage loans and related investments may be necessary if the deterioration in
real estate markets continues, or there is a significant increase in the Trust's
cost of capital. See also Note 1, "Adoption of Authoritative Statements."
PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE
Properties acquired through foreclosure and held for sale are recorded at
the lower of cost or fair value at acquisition, which becomes the cost basis for
accounting purposes. The fair value of the asset acquired, in accordance with
FASB Statement 15, is the amount that the Trust could reasonably expect to
receive in a current sale between a willing buyer and a willing seller. Such
properties are thereafter accounted for in the same manner as any similar asset
acquired for investment as to depreciation and gain or loss upon sale.
Subsequent to foreclosure, the properties are carried at the lower of cost or
fair value less estimated costs to sell, as set forth in The American Institute
of Certified Public Accountants' Statement of Position 92-3, "Accounting for
Foreclosed Assets". See also Note 1, "Adoption of Authoritative Statements."
33
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Those properties acquired through foreclosure and held for sale are
reclassified from non-earning to earning status if they produce and maintain for
a minimum of two consecutive quarters an annualized return of 5% or greater cash
flow yield.
IN-SUBSTANCE FORECLOSURE
A loan is considered an in-substance foreclosure if: (1) the debtor has
little or no equity considering the fair value of the collateral, (2) proceeds
for repayment can be expected to come only from operation or sale of the
collateral, and (3) the debtor has either formally or effectively abandoned
control of the collateral. Loans meeting the criteria for in-substance
foreclosure are reclassified and recorded at the lower of cost or fair value of
the collateral, which establishes a new cost basis in the same manner as a legal
foreclosure.
NET LOSS PER SHARE
Net loss per share for fiscal years ended 1993, 1992 and 1991 is computed
using the weighted average common shares outstanding during each period.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed on the straight-line method over
an estimated useful life of 40 years for buildings and three to five years for
other property and lease commissions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments (high grade
commercial paper of $9.6 million at September 30, 1993) with maturities ranging
from 1 to 34 days.
Included in cash and cash equivalents is $1.3 million of restricted cash
which represents the funding of the employee retention plan (see Note 8) and
$1.5 million related to borrowers' deposits. See Item 1, "Business" for
additional information regarding the enforcement of the Indenture Trustee's
security interest in the deposit accounts of the Trust and the Trust's
obligation to pay the excess of available cash as defined in the Indenture) over
$10 million to Senior Note holders.
2. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE
The following table summarizes the Trust's mortgage loan portfolio:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993 SEPTEMBER 30, 1992
-------------------------- --------------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF UNDERLYING SECURITY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------ ----------- ----------- ----------- -----------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Apartments.................... 3 $ 5,391 7 $ 18,888
Residential/Condominium*...... 10 1,841 12 2,149
Office Buildings.............. 1 1,135 6 38,938
Industrial Buildings.......... 10 44,086 14 82,261
Research & Development........ 5 25,942 8 48,209
Retail Buildings.............. 6 22,738 9 43,923
Hotels/Motels................. 1 3,060 1 3,060
----------- ----------- ----------- -----------
Total..................... 36 $104,193 57 $237,428
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<FN>
- ------------------------
* Includes 107 mortgage end loans on 10 projects at September 30, 1993 and 136
mortgage end loans on 12 projects at September 30, 1992.
</TABLE>
At September 30, 1993, the Trust had undisbursed commitments of $1,632,000,
all of which represents additional advances on partially funded mortgage loans.
34
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (CONTINUED)
As of September 30, 1993, there were no earning loans delinquent (more than
60 days past due) as to principal and/or interest.
The Trust has had a significant increase in the number of loans being
restructured as its borrowers continue to face deteriorating conditions in the
real estate market. It is expected that these conditions may continue for an
additional period of time requiring the Trust, where appropriate, to continue
restructuring loans.
At September 30, 1993 and 1992, loans totalling $33,403,000 and $50,911,000,
respectively, were extended beyond their original contractual maturity dates.
Loan terms are extended in the normal course of business for various reasons,
such as delays in construction, slower leasing than originally anticipated or
delay in obtaining permanent financing.
At September 30, 1992, earning mortgage loans totalling $60,028,000 had been
subject to contractual interest rate modification due to financial difficulties
of the borrower. During fiscal 1993, one loan totalling $1,608,000 was
reinstated at a rate above the original contractual rate. The remaining loans
totalling $58,420,000 were transferred to in-substance foreclosure. No interest
rate modifications were made on mortgage loans during fiscal 1993.
At September 30, 1993 and 1992, mortgage loans outstanding consisted of
fixed rate loans of $21,268,000 and $67,806,000, floating rate loans of
$70,745,000 and $125,924,000 and participating loans of $12,180,000 and
$43,698,000, respectively. Non-earning loans (including non-earning in-substance
foreclosures) and non-earning properties acquired through foreclosure and held
for sale were $60,248,000 at September 30, 1993 compared to $76,316,000 at
September 30, 1992.
The following table summarizes the Trust's investment in in-substance
foreclosures at September 30, 1993 and September 30, 1992:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993 SEPTEMBER 30, 1992
-------------------------- --------------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------ ----------- ----------- ----------- -----------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
EARNING
Office Buildings.............. 2 $12,831 -- $--
Industrial Buildings.......... 1 4,901 -- --
Retail Buildings.............. 3 28,238 -- --
Apartments.................... 1 6,689 -- --
Research & Development
Buildings.................... 3 17,048 -- --
----------- ----------- ----------- -----------
Total Earning............... 10 69,707 -- --
----------- ----------- ----------- -----------
NON-EARNING
Office Buildings.............. 1 7,433 2 8,536
Industrial Buildings.......... 3 7,576 3 11,562
Retail Buildings.............. 1 2,453 2 21,123
Apartments.................... -- -- -- --
Research & Development
Buildings.................... -- -- 1 6,400
Hotel......................... -- -- 1 2,398
----------- ----------- ----------- -----------
Total Non-Earning........... 5 17,462 9 50,019
----------- ----------- ----------- -----------
Total....................... 15 $87,169 9 $50,019
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
35
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (CONTINUED)
The following table summarizes the Trust's investment in real estate
equities, net of accumulated depreciation of $7,800,000 at September 30, 1993
and $5,686,000 at September 30, 1992:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993 SEPTEMBER 30, 1992
------------------------ ------------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------ ------------ -------- ------------ --------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Office Buildings*............. 4 $26,504 4 $29,823
Industrial Buildings.......... 1 6,626 1 6,786
Retail Buildings.............. 1 24,083 1 20,533
----- -------- ----- --------
Total..................... 6 $57,213 6 $57,142
----- -------- ----- --------
----- -------- ----- --------
<FN>
- ------------------------
* As of September 30, 1993, the Trust charged-off $2.4 million against the
allowance for losses on one of the office building investments due to
permanent impairment.
</TABLE>
The following table summarizes the Trust's investment in properties acquired
through foreclosure and held for sale, net of accumulated depreciation of
$6,143,000 at September 30, 1993 and $4,524,000 at September 30, 1992:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993 SEPTEMBER 30, 1992
------------------------ ------------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------ ------------ -------- ------------ --------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
EARNING
Apartments.................... 4 $18,631 4 $20,012
Office Buildings.............. 5 11,283 5 15,702
Industrial Buildings.......... 5 18,399 3 13,208
Retail Buildings.............. 1 1,394 2 5,127
Research & Development
Bldgs........................ 1 2,879 -- --
------ -------- ------ --------
Total Earning............... 16 52,586 14 54,049
------ -------- ------ --------
NON-EARNING
Office Buildings.............. 3 7,563 3 4,905
Industrial Buildings.......... 5 15,796 4 16,421
Retail Buildings.............. 3 12,775 2 3,648
Apartments.................... -- -- 1 782
------ -------- ------ --------
Total Non-Earning........... 11 36,134 10 25,756
------ -------- ------ --------
Total..................... 27 $88,720 24 $79,805
------ -------- ------ --------
------ -------- ------ --------
</TABLE>
3. ALLOWANCE FOR LOSSES
The changes in the allowance for losses for the years ended September 30,
1993, 1992 and 1991 were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year......................................... $ 19,353 $ 14,707 $ 10,792
Provisions charged to expense........................................ 37,000 32,000 33,000
--------- --------- ---------
56,353 46,707 43,792
Less charges against allowance....................................... 44,545 27,354 29,085
Balance at end of year............................................... $ 11,808 $ 19,353 $ 14,707
--------- --------- ---------
--------- --------- ---------
</TABLE>
36
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. ALLOWANCE FOR LOSSES (CONTINUED)
Approximately $6,394,000, $4,488,000 and $2,804,000 of the allowance at
September 30, 1993, 1992 and 1991, respectively, are applicable to properties
acquired through foreclosure and held for sale.
4. SENIOR NOTES
SENIOR SECURED NOTES
The lack of liquidity in the commercial real estate markets continued during
the fiscal year. Although the Trust was able to meet the required principal
payment at December 31, 1992, reducing the principal balance of the Senior Notes
to $290 million, it did not have sufficient funds to meet the $20 million
required principal payment due June 30, 1993. The average borrowing rate for
fiscal 1993 and 1992, respectively, was 9.23% and 8.34%. At September 30, 1993,
the blended interest rate on the Senior Notes was 9.87%, composed of interest at
9.25% on $200 million of Senior Notes (including default interest at 1%) and
11.25% on $90 million of deferred amounts of Senior Notes (including default
interest at 1%). The entire unamortized cost of restructuring of the Senior
Notes was charged off during fiscal 1993 as a result of the monetary default.
The Trust expensed $3.4 million in fiscal 1993, of which $2.4 million related to
the acceleration of costs due to the June 1993 montary default. Prior to the
default, these costs were being amortized using the interest method over the
term of the debt. See Item 1, "Business" for additional information regarding
certain other required payments not made subsequent to June 30, 1993 and other
events of default.
Payment of the Senior Notes is secured by liens against all real and
personal properties of the Trust as required by the 1991 Plan and the Indenture.
LOAN ON EQUITY INVESTMENT
In November 1991, the Trust acquired full ownership of a retail center in
which it had a partnership interest. The Trust has a construction borrowing
commitment of $18.7 million of which $17.6 million was outstanding at September
30, 1993. The contractual interest rate on this loan is 7-1/2% (Prime +1 1/2%,
floor of 9%) at September 30, 1993, and the loan matures in April 1994.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Trust.
The carrying value of cash and cash equivalents approximates their fair
value because of the liquidity and short-term maturities of these instruments.
The fair value of mortgage loans is estimated by discounting cash flows at what
is considered a market interest rate for loans with similar terms to borrowers
of similar credit quality.
The fair value of the Senior Notes at September 30, 1993 is based on a
significant trade which occurred in August 1993 and for which the Trust obtained
pricing information. The secondary market for this debt has a limited number of
participants which may result in significant volatility in this debt.
Loan on equity investment is a variable rate loan that reprices frequently,
thus fair value is based on the carrying amount of the loan.
37
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Trust's financial instruments at September
30, 1993 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents................................................. $ 11,451 $ 11,451
Mortgage loans and long-term receivable (net of allowance for possible
losses).................................................................. 104,269 103,492
FINANCIAL LIABILITIES:
Senior Notes.............................................................. (290,000) (216,100)
Loan on equity investment................................................. (17,572) (17,572)
Off-Balance Sheet Financial Instruments:
Unfunded loan commitments............................................... -- 1,632
</TABLE>
6. SHARE OPTION PLAN
As of September 30, 1993, options to purchase 452,500 Common Shares were
outstanding under the 1984 Share Option Plan. The exercise price per share
varies from $2.50 to $14.50. Options granted, other than those granted in fiscal
1991, expire five years from the date of grant and may be exercised at any time
six months after the date of grant, subject to the limitation that the aggregate
fair market value (determined as of the time the Option is granted) of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by any participant during any calendar year shall not exceed
$100,000. Options granted during fiscal 1991, pursuant to the Employee Retention
Plan described in Note 8, expire five years from the date of grant but do not
vest until three years from the date of grant. During the fiscal year ended
September 30, 1993, no options were granted. During the fiscal year ended
September 30, 1992, options to purchase 181,000 Common Shares at a price of
$2.50 were granted to Trustees and certain officers of the Trust. Options to
purchase 132,000 Common Shares at prices from $4.15 to $18.625 terminated during
the fiscal year ended September 30, 1993.
In addition to cash, options may be exercised by exchanging the Trust's
Common Shares valued at the market price on the date of exercise of the options.
During the fiscal year ended September 30, 1993, no options were exercised.
7. PENSION PLANS
EMPLOYEES
On September 20, 1989, the Trustees adopted an Employees' Retirement Plan
effective September 30, 1989. On December 16, 1992, the Trustees amended and
restated the Employees' Retirement Plan effective January 1, 1992 to conform to
amended regulations.
The Trust maintains this non-contributing, defined benefit pension plan for
all eligible employees. Benefits under the plan are generally based on years of
service and average annual base salary rate. Pension costs are accrued and
funded annually from entry date in the plan to projected retirement date and
include service costs for benefits earned during the period and interest costs
on the projected benefit obligation less the return on plan assets. Pension
expense was $60,000 for the year
38
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. PENSION PLANS (CONTINUED)
ended September 30, 1993 and $136,000 for the year ended September 30, 1992. The
actual return on plan assets was $53,465 for the year ended September 30, 1993
and $72,492 for the year ended September 30, 1992. The funding status of the
pension plan is:
<TABLE>
<CAPTION>
9/30/93 9/30/92
----------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................................. $ 677,000 $ 577,000
Accumulated benefit....................................................... 694,000 585,000
Projected benefit obligation.............................................. 993,000 1,126,000
Plan assets at market value............................................... 998,000 892,000
Key economic assumptions used in these determinations were:
Discount rate............................................................. 8.0% 8.0%
Rate of increase in compensation levels................................... 3.0% 6.0%
Expected long-term rate of return......................................... 9.0% 8.0%
</TABLE>
TRUSTEES
Effective October 1, 1989, the Trust established a pension plan for
Trustees. All Trustees on or after the effective date (including Trustees who
are employees of the Trust) are eligible to receive the basic normal retirement
benefit under the plan upon completion of five years of credited board service.
Benefits under the plan are based on the annual retainer in effect at the time
the Trustee retires or otherwise terminates service. Plan benefits will be paid
for a period equal to the number of years served as Trustee after January 1,
1980, except that payments will cease upon the death of the Trustee.
The benefit provided by the plan is a contractual obligation on behalf of
the Trust and is payable out of assets of the Trust that are subject to the
claims of creditors of the Trust. It is not intended that the plan be funded.
Accrued pension expense was $60,000 for each of the years ended September
30, 1993 and 1992. The total accumulated benefit obligation at September 30,
1993 was $433,000.
8. EMPLOYEE RETENTION PLAN
The Trust established an Employee Retention Plan, to be administered by the
Compensation and Nominating Committee (the "Committee"), in order to assure the
continuity and performance of employees of the Trust. The Plan contains four
categories of benefits: an incentive program, stock options, termination pay and
a retention bonus.
The Committee established an incentive program for calendar year 1991. The
incentive pool was calculated based on the reduction of the Trust's outstanding
debt (the Senior Notes). On January 3, 1992, the principal balance of the Senior
Notes was reduced to $329 million resulting in an incentive bonus pool of
$160,000. On September 16, 1993, the Committee approved a continuation of the
incentive program for 1992 based on a similar formula for reducing the principal
balance of the Senior Notes. At December 31, 1992, the principal balance of the
Senior Notes was reduced to $290 million resulting in an incentive bonus pool of
$125,000.
On March 29, 1991, the Committee awarded stock options for the purchase of
197,500 Common Shares at an option price of $4.15. The options do not vest until
three years from the date of grant.
A termination pay plan has been established to cover termination of
employment without cause during the period that the Senior Notes are
outstanding. Employees will be entitled to compensation ranging from a minimum
of twelve weeks to a maximum of eighteen months pay. In addition, certain health
benefits will continue to be paid by the Trust over a period of time equal to
the period used in
39
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE RETENTION PLAN (CONTINUED)
calculating severance pay. The Trust estimates that the maximum cost of the
termination pay plan would be approximately $1.3 million and the cost is charged
to expense at date of termination (as defined in the termination pay plan).
The retention bonus, which totalled $350,000, was paid on February 28, 1992
to certain employees who remained with the Trust one year after the Effective
Date of the 1991 Plan (February 27, 1991).
9. ISSUANCE OF SHARES
Effective April 1, 1992, the Trust terminated its Dividend Reinvestment and
Share Purchase Plan.
In January 1985, the Trust issued 2,200,000 warrants for the right to
purchase 3,300,000 Common Shares at a price of $20.50 per share. The warrants
expired on January 15, 1992.
The Trust is authorized to issue up to 3,500,000 Preferred Shares on terms
to be established by the Trustees. No preferred shares have been issued to date.
See also Note 10, "Litigation."
10. LITIGATION
The consolidated class and derivative actions pending in the United States
District Court for the Eastern District of Pennsylvania filed in March 1990
against certain of the Trust's present and former Trustees and officers and the
Class 5 claims against the Trust remaining in the Chapter 11 proceeding in the
United States Bankruptcy Court for the Central District of California were
settled effective September 17, 1993. The class actions and claims alleged
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and negligent misrepresentation under the common law by
reason of misleading statements in the Trust's reports filed with the SEC and
other information disseminated to the public. The derivative action alleged
mismanagement on the part of the Trustees which resulted in the bankruptcy.
Under the terms of the settlement: (1) the Trust contributed 150,000 Common
Shares to the settlement of the class claims; (2) the director and officer
liability insurance carrier contributed $860,000 on behalf of the individual
defendants in the class actions; and (3) the insurance carrier paid on behalf of
the individual defendants in the derivative action $65,000 to counsel for the
derivative plaintiffs. The settlement was approved by both courts after notice
to the class members and the shareholders of the Trust.
As described above, the Trust made no cash payments in connection with the
settlement. While the Trust and the individual defendants continue to believe
that their actions were entirely proper and violated no laws, the Trustees
decided to settle the claims in order to avoid additional legal expense and the
diversion of management's time and energy at a time when the operations of the
Trust demanded their undivided attention.
40
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
10. LITIGATION (CONTINUED)
The quarterly results of operations for fiscal 1993 and 1992 are summarized
as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- --------- ------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 1993
Total income................ $ 9,577 $ 10,291 $ 9,643 $ 8,831
Interest expense............ 6,839 6,851 6,919 7,901
Provision for losses........ 3,000 5,000 14,000 15,000
Reorganization expense...... 245 482 950 4,167
Net loss.................... (5,497) (7,667) (17,478) (23,327)
Net loss per share.......... $(0.50) $(0.69) $(1.58) $(2.10)
FISCAL 1992
Total income................ $11,997 $ 10,113 $ 10,336 $ 9,563
Interest expense............ 8,209 6,713 6,815 7,219
Provision for losses........ 5,000 6,000 11,000 10,000
Reorganization expense...... 141 226 233 334
Net loss.................... (5,195) (7,054) (12,586) (12,637)
Net loss per share.......... $(0.47) $(0.64) $(1.13) $(1.14)
</TABLE>
41
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
INITIAL COST TO TRUST COSTS GROSS AMOUNT CARRIED AT END OF PERIOD
------------------------- CAPITALIZED --------------------------------------------
BUILDINGS & SUBSEQUENT TO BUILDINGS &
CLASSIFICATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ---------------------------- ------------ ----------- ------------ ------------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENTS IN REAL ESTATE
EQUITIES
Office Building:
Lower Providence, PA.... $ -- $ -- $ 9,723,000 $ 708,000 $ -- $10,431,000 $10,431,000
Anaheim, CA............. -- 2,145,000 6,810,000 1,555,000 2,145,000 8,365,000 10,510,000
Boston, MA.............. -- 500,000 2,033,000 470,000 500,000 2,503,000 3,003,000
Portland, OR............ -- 1,500,000 6,197,000 442,000 1,500,000 6,639,000 8,139,000
Industrial Center:
Whittier, CA............ -- 1,500,000 5,023,000 1,489,000 1,500,000 6,512,000 8,012,000
Retail Building:
Fremont, CA............. 17,572,000 6,528,000 15,161,000 3,228,000 6,528,000 18,389,000 24,917,000
------------ ----------- ------------ ------------- ----------- ------------ -----------------
$17,572,000 $12,173,000 $44,947,000 $ 7,892,000 $12,173,000 $52,839,000 $65,012,000(a)(b)
------------ ----------- ------------ ------------- ----------- ------------ -----------------
------------ ----------- ------------ ------------- ----------- ------------ -----------------
<CAPTION>
LIFE ON WHICH
DEPRECIATION
ACCUMULATED IN LATEST
DEPRECIATION INCOME
AND DATE STATEMENT IS
CLASSIFICATION AMORTIZATION ACQUIRED COMPARED
- ---------------------------- ------------ -------- -------------
<S> <C> <C> <C>
INVESTMENTS IN REAL ESTATE
EQUITIES
Office Building:
Lower Providence, PA.... $ 2,027,000 1987 40 YR.
Anaheim, CA............. 1,598,000 1988 40 YR.
Boston, MA.............. 657,000 1990 40 YR.
Portland, OR............ 1,297,000 1989 40 YR.
Industrial Center:
Whittier, CA............ 1,386,000 1987 40 YR.
Retail Building:
Fremont, CA............. 834,000 1992 40 YR.
------------
$ 7,799,000
------------
------------
</TABLE>
42
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XI (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1993
NOTES:
(a) Cost for federal income tax purposes $64,433,000.
(b) The changes in gross carrying amounts during the year ended September 30,
1993 are summarized as follows:
<TABLE>
<S> <C> <C>
Balance at September 30, 1992.............................. $46,400,000
Additions during year:
Reclassification from real estate equities held for sale
and other assets........................................ $16,427,000
Improvements............................................. 2,505,000
Loan advance by construction lender...................... 2,057,000 20,989,000
-----------
Deductions during year:
Charge off against allowance for losses.................. 2,377,000
-----------
Balance at September 30, 1993............................ $65,012,000
-----------
-----------
The changes in gross carrying amounts during the year ended September 30, 1992 are
summarized as follows:
Balance at September 30, 1991.............................. $24,863,000
Additions during year:
Improvements............................................. $ 1,400,000
Transfer of investment in partnership.................... 7,241,000
Acquisition of partnership interest...................... 14,448,000
Loan advance by construction lender...................... 2,473,000 25,562,000
-----------
Deductions during year:
Charge off against allowance for losses.................. 4,025,000
-----------
Balance at September 30, 1992.............................. $46,400,000
-----------
-----------
The changes in gross carrying amounts during the year ended September 30, 1991 are
summarized as follows:
Balance at September 30, 1990.............................. $32,615,000
Additions during year:
Improvements............................................. 466,000
Deductions during year:
Charge off against allowance for losses.................. 8,218,000
-----------
Balance at September 30, 1991.............................. $24,863,000
-----------
-----------
The change in accumulated depreciation and amortization during the year ended September
30, 1993 is summarized as follows:
Balance at September 30, 1992.............................. $ 3,132,000
Additions during year:
Reclassification from real estate equities held for sale
and other assets........................................ 2,553,000
Charge to income......................................... 2,114,000
-----------
Balance at September 30, 1993.............................. $ 7,799,000
-----------
-----------
</TABLE>
43
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XI (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1993
<TABLE>
<S> <C> <C>
The change in accumulated depreciation and amortization during the year ended September
30, 1992 is summarized as follows:
Balance at September 30, 1991.............................. $ 1,789,000
Additions during year:
Charge to income......................................... 1,343,000
-----------
Balance at September 30, 1992............................ $ 3,132,000
-----------
-----------
The change in accumulated depreciation and amortization during the year ended September
30, 1991 is summarized as follows:
Balance at September 30, 1990.............................. $ 1,453,000
Additions during year:
Charge to income......................................... 523,000
Deductions during year:
Charge-off on real estate transferred.................... 187,000
-----------
Balance at September 30, 1991............................ $ 1,789,000
-----------
-----------
</TABLE>
44
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
LOANS SUBJECT
TO DELINQUENT
NUMBER OF INTEREST CARRYING AMOUNT OF PRINCIPAL OR
TYPE OF LOANS LOANS RATE FINAL MATURITY DATE MORTGAGES INTEREST
- ---------------------------- ----------- ------------- ----------------------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Construction Loans:
Retail buildings:
Philadelphia, PA........ 1 9.00% December 1993 $ 3,250,000 $ --
Research & development
buildings................ 1 9.00% November 1993 1,953,000 --
------------------ -------------
5,203,000 --
------------------ -------------
Standing Loans:
Apartments:
Hammond, IN............. 1 8.00% September 1993 4,300,000 --
Industrial buildings:
Uwchlan Twp., PA........ 1 8.00% December 1993 16,603,000 --
Carson, CA.............. 1 9.00% February 1995 4,009,000 --
Tucson, AZ.............. 1 10.50% October 1993 7,135,000 --
Chino, CA............... 1 8.00% January 1995 5,208,000 5,208,000
Marina Del Ray, CA...... 1 8.00% March 1995 5,441,000 --
Others.................. 3 7.00%-10.00% January 1995-July 1997 2,909,000 --
Retail Buildings:
Philadelphia, PA........ 1 7.50% December 1993 6,200,000 --
El Toro, CA............. 1 7.50% January 1995 8,846,000 --
Citrus Heights, CA...... 1 9.00% February 1994 3,957,000 --
Research & development
buildings:
Santa Ana, CA........... 1 7.50% January 1994 11,927,000 --
San Dumas, CA........... 1 9.00% March 1994 2,484,000 --
Hotel..................... 1 10.00% October 1996 3,060,000 --
------------------ -------------
82,079,000 5,208,000
------------------ -------------
Long-Term Amortizing Loans:
Office buildings.......... 1 9.75% April 1999 1,135,000 --
Apartments................ 2 8.875%-8.00% July 2000-April 2004 1,091,000 --
Residential/Condominiums
(a)...................... 107 6.20%-9.50% July 1994-June 2009 1,841,000 --
Retail building........... 2 8.00%-8.875% August 1994-November 1999 484,000 --
Industrial buildings...... 1 9.00% April 1999 180,000 --
------------------ -------------
4,731,000 --
------------------ -------------
Participating Loans and
Investments:
Industrial buildings:
Worcester, MA........... 1 11.00% May 1996 2,602,000 --
Research & development
buildings:
Jacksonville, FL........ 1 9.25% December 1998 4,475,000 --
Allentown, PA........... 1 10.25% December 1999 5,103,000 --
------------------ -------------
12,180,000 --
------------------ -------------
Total Mortgage Loans and
Investments................ $ 104,193,000(b)(c) $ 5,208,000
------------------ -------------
------------------ -------------
</TABLE>
45
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XII (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 1993
NOTES:
(a) Consists of 107 mortgage end loans on 10 projects.
(b) The aggregate cost for federal income tax purposes is $104,632,000.
(c) The change in carrying value of mortgage loans during the year ended
September 30, 1993 were as follows:
<TABLE>
<S> <C>
Balance at September 30, 1992.......................................... $ 237,428,000
Advances on mortgage loans............................................. 602,000
Transfer of real estate to mortgage loans.............................. 348,000
Net change in interest reserves, deferred income....................... 1,323,000
-------------
239,701,000
Collections of principal............................................... 24,604,000
Transfer to real estate................................................ 110,218,000
Chargeoff against allowance for losses................................. 686,000
-------------
$ 104,193,000
-------------
-------------
The change in carrying value of mortgage loans during the year ended September 30, 1992
were as follows:
Balance at September 30, 1991.......................................... $ 344,632,000
Advances on mortgage loans............................................. 2,624,000
Transfer of real estate to mortgage loans.............................. 940,000
Net change in interest reserves, deferred income....................... 426,000
-------------
348,622,000
Collections of principal............................................... 50,674,000
Transfer to real estate................................................ 56,554,000
Chargeoff against allowance for losses................................. 3,566,000
Other.................................................................. 400,000
-------------
$ 237,428,000
-------------
-------------
The change in carrying value of mortgage loans during the year ended September 30, 1991
were as follows:
Balance at September 30, 1990.......................................... $ 429,052,000
Advances on mortgage loans............................................. 26,335,000
Transfer of real estate to mortgage loans.............................. 3,060,000
Net change in interest reserves, deferred income....................... 9,471,000
-------------
467,918,000
Collections of principal............................................... 45,853,000
Transfer to real estate................................................ 73,479,000
Other.................................................................. 3,954,000
-------------
$ 344,632,000
-------------
-------------
</TABLE>
46
<PAGE>
MORTGAGE AND REALTY TRUST
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------ -------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Declaration of Trust as amended through February 17, 1993 (1) (Exhibit 3).
3.2 By-Laws, as amended through June 20, 1984 (2) (Exhibit 3.3).
4.1 Form of Certificate for Common Shares (3) (Exhibit 1A).
4.2 (a) Joint Plan of Reorganization Proposed by Debtor, Creditors' Committee and Equity Security Holders
Committee (4) (Exhibit 10.11).
4.2 (b) Modification to Joint Plan of Reorganization Proposed by Debtor, Creditors' Committee and Equity
Security Holders Committee (5) (Exhibit 2).
4.2 (c) Amendment No. 1 and Consent to Plan of Reorganization dated as of September 30, 1991 (6) (Exhibit
4.4(c)).
4.2 (d) Amendment No. 2 to Plan of Reorganization, dated as of July 15, 1992 (7) (Exhibit 4.2(d)).
4.3 Indenture dated as of July 15, 1992 between Mortgage and Realty Trust and Wilmington Trust Company, as
trustee, governing the registrant's Senior Secured Uncertificated Notes due 1995 (7) (Exhibit 4.3).
10.1 1984 Share Option Plan (8) (Exhibit 19.1).
10.2 Form of Incentive Stock Option Agreement under the 1984 Share Option Plan (9) (Exhibit 10.9).
10.3 Form of Non-Qualified Stock Option Agreement under the 1984 Share Option Plan (2) (Exhibit 10.19).
10.4 Amended and Restated Saving Incentive Plan effective January 1, 1992 (7) (Exhibit 10.7).
10.5 Amended and Restated Employees' Retirement Plan effective January 1, 1992 (7) (Exhibit 10.8).
10.6 Pension Plan for Trustees dated October 1, 1989 (10) (Exhibit 10.13).
10.7 Employee' Retention Plan dated October 17, 1990 as amended January 16, 1991 and March 10, 1991 (11)
(Exhibit 19.1).
11* Schedule of Net Income Per Share for the years ended September 30, 1993, 1992 and 1991
21* Subsidiaries
23* Consent of Ernst & Young dated January 3, 1994
<FN>
- ------------------------
(1) Filed on May 13, 1993 as an exhibit to the Quarterly Report on Form 10-Q
(No. 1-6613) and incorporated herein by reference.
(2) Filed on December 6, 1984 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(3) Filed on May 20, 1981 as an exhibit to Amendment No. 1 to the Registration
Statement on Form 8-A (No. 1-6613) and incorporated herein by reference.
(4) Filed on December 28, 1990 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(5) Filed on March 14, 1991 as an exhibit to the Current Report on Form 8-K
(No. 1-6613) and incorporated herein by reference.
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
(6) Filed on December 27, 1991 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(7) Filed on December 22, 1992 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(8) Filed on August 13, 1987 as an exhibit to the Quarterly Report on Form 10-Q
(No. 1-6613) and incorporated herein by reference.
(9) Filed on December 29, 1987 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(10) Filed on December 21, 1989 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(11) Filed on May 14, 1991 as an exhibit to the Quarterly Report on Form 10-Q
(No. 1-6613) and incorporated herein by reference.
* Exhibit filed with this Form 10-K.
</TABLE>
48
<PAGE>
EXHIBIT 11
MORTGAGE AND REALTY TRUST
SCHEDULE OF NET INCOME PER SHARE -- ASSUMING FULL DILUTION
FOR THE YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1993 1992
--------------- ---------------
<S> <C> <C>
BASIS:
Net (loss)..................................................................... $ (53,969,000) $ (37,472,000)
Average common shares outstanding.............................................. 11,080,000 11,076,000
20% limitation on assumed repurchase........................................... 2,216,000 2,215,000
Market price at the end of the period.......................................... $.375 $1.125
Options outstanding............................................................ 452,500 584,500
COMPUTATION:
Proceeds:
Options...................................................................... 452,500 584,500
Average exercise price....................................................... X $5.36 X $8.15
--------------- ---------------
$ 2,425,000 $ 4,764,000
--------------- ---------------
--------------- ---------------
Adjustment of proceeds:
Purchase of outstanding common shares at market.............................. $ 831,000 $ 2,492,000
Retirement of debt........................................................... 1,594,000 2,272,000
--------------- ---------------
$ 2,425,000 $ 4,764,000
--------------- ---------------
--------------- ---------------
Adjustment of net income (loss):
Net (loss) before gain on sales of real estate............................... $ (53,969,000) $ (37,472,000)
Interest reduction........................................................... 135,000 176,000
--------------- ---------------
Adjusted net (loss)........................................................ $ (53,834,000) $ (37,296,000)
--------------- ---------------
--------------- ---------------
Adjustment of shares outstanding:
Average shares outstanding................................................... 11,080,000 11,076,000
Net shares repurchased....................................................... (1,764,000) (1,631,000)
--------------- ---------------
Adjusted shares outstanding (basis for computation of net income per share
-- assuming full dilution)................................................ 9,316,000 9,445,000
--------------- ---------------
--------------- ---------------
Fully diluted earnings per share:
Net (loss)................................................................... $(5.78) $(3.95)
--------------- ---------------
--------------- ---------------
<FN>
- ------------------------
NOTE -- Primary earnings per share is based on the average number of shares
outstanding.
</TABLE>
49
<PAGE>
EXHIBIT 11
MORTGAGE AND REALTY TRUST
SCHEDULE OF NET INCOME PER SHARE -- ASSUMING FULL DILUTION
FOR THE YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1991
-------------------------------
<S> <C> <C>
BASIS:
Net (loss)....................................................................... $ (35,653,000)
Average common shares outstanding................................................ 11,076,000
Warrants outstanding to purchase equivalent shares............................... 3,196,000
20% limitation on assumed repurchase............................................. 2,215,000
Exercise price per share (warrants).............................................. $20.50
Market price at the end of the period............................................ $2.00
Options outstanding.............................................................. 490,000
Conversion of subordinated debentures............................................ --
COMPUTATION:
Proceeds:
Warrants to purchase common shares............................................. 3,196,000
Exercise price................................................................. X $20.50 $ 65,518,000
--------------
Options........................................................................ 490,000
Average exercise price......................................................... X $12.51 6,130,000
--------------
Proceeds from subordinated debenture conversions............................... --
---------------
$ 71,648,000
---------------
---------------
Adjustment of proceeds:
Purchase of outstanding common shares at market value.......................... $ 4,430,000
Retirement of debt............................................................. 67,218,000
---------------
$ 71,648,000
---------------
---------------
Adjustment of net (loss):
Net (loss) before gain on sales of real estate................................. $ (35,897,000)
Interest reduction............................................................. 6,218,000
---------------
(29,679,000)
Gain on sales of real estate..................................................... 244,000
---------------
Adjusted net (loss)............................................................ $ (29,435,000)
---------------
---------------
Adjustment of shares outstanding:
Average shares outstanding..................................................... 11,076,000
Net additional shares issuable................................................. 1,471,000
---------------
Adjusted shares outstanding (basis for computation of net income per share --
assuming full dilution)..................................................... 12,547,000
---------------
---------------
Fully diluted earnings per share:
Loss before gain on sales of real estate....................................... $(2.37)
Gain on sales of real estate................................................... .02
---------------
Net (loss)................................................................... $(2.35)*
---------------
---------------
<FN>
- ------------------------
* Amount is anti-dilutive.
NOTE -- Primary earnings per share is based on the average number of shares
outstanding.
</TABLE>
50
<PAGE>
EXHIBIT 21
MORTGAGE AND REALTY TRUST
SUBSIDIARIES AS OF SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
PERCENTAGE OF STATE OF
NAME OWNERSHIP ORGANIZATION
- ------------------------------------ ---------------------- -------------------
<S> <C> <C>
MRT West, Inc. (corporation) 100% California
Paseo Padre Associates 85% California
(limited partnership) (Limited partner
interest)
15%
(General partner
interest
through MRT West)
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our reports and to all references to our
firm in this Annual Report (Form 10-K) of Mortgage and Realty Trust, and to the
incorporation by reference in the Registration Statements on Form S-3 for the
1984 Share Option Plan, and in the related Prospectuses of Mortgage and Realty
Trust of our report dated January 3, 1994 with respect to the financial
statements and schedules of Mortgage and Realty Trust included in this Annual
Report (Form 10-K) for the year ended September 30, 1993.
ERNST & YOUNG
Philadelphia, Pennsylvania
January 7, 1994
