<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File Number 1-6613
MORTGAGE AND REALTY TRUST
-----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 23-1862664
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8380 Old York Road, Suite 300
Elkins Park, Pennsylvania 19117-1590
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 881-1525
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 whether the registrant has filed all documents and
reports required to be filed by Sections 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
----- -----
Number of Common Shares Outstanding at December 31, 1993:
11,226,215
<PAGE>
MORTGAGE AND REALTY TRUST
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDING DECEMBER 31, 1993
PART I
1. Unaudited Financial Statements for the periods ended
December 31, 1993 and 1992 include the following:
Balance Sheet at December 31, 1993 and September
30, 1993
Statement of Operations for the three months ended
December 31, 1993 and 1992
Statement of Cash Flows for the three months ended
December 31, 1993 and 1992
Statement of Shareholders' Equity for the three
months ended December 31, 1993
Notes to the Financial Statements
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II
3. Defaults Upon Senior Securities
6. Exhibits and Reports on Form 8-K
1
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
BALANCE SHEET
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
1993 1993
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Mortgage loans and investments:
Construction loans $ 5,204,000 $ 5,203,000
Standing loans 72,561,000 76,871,000
Long-term amortizing loans 4,506,000 4,731,000
Participating loans and investments 12,183,000 12,180,000
Non-earning mortgage loans 9,508,000 5,208,000
------------ ------------
103,962,000 104,193,000
In-substance foreclosures:
Earning 75,609,000 69,707,00
Non-earning 9,748,000 17,462,000
Real estate:
Investment in real estate equities 57,122,000 57,213,000
Properties acquired through foreclosure and
held for sale:
Earning 60,979,000 52,586,000
Non-earning 22,566,000 36,134,000
Investment in partnerships 9,727,000 9,831,000
------------ ------------
339,713,000 347,126,000
Less allowance for losses (11,593,000) (11,808,000)
------------ ------------
328,120,000 335,318,000
Cash and cash equivalents 20,661,000 11,451,000
Interest receivable and other assets 7,825,000 7,105,000
------------ ------------
$356,606,000 $353,874,000
------------ ------------
------------ ------------
LIABILITIES:
Senior Secured Notes $290,000,000 $290,000,000
Loan on equity investment 17,578,000 17,572,000
Accounts payable and accrued expenses 12,061,000 4,679,000
------------ ------------
319,639,000 312,251,000
------------ ------------
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 11,226,000 11,226,000
Additional paid-in capital 182,375,000 182,375,000
Accumulated deficit (156,634,000) (151,978,000)
------------ ------------
Total shareholders' equity 36,967,000 41,623,000
------------ ------------
$356,606,000 $353,874,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
2
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992
----------- ----------
<S> <C> <C>
INCOME:
Interest and fee income on mortgage
loans $ 3,998,000 $ 4,928,000
Additional interest and fee income on
participating mortgage loans 7,000 6,000
Rental income 4,733,000 4,543,000
Interest on short-term investments 94,000 83,000
Other 14,000 17,000
---------- ----------
8,846,000 9,577,000
---------- ----------
EXPENSES:
Interest 7,799,000 6,839,000
Expenses of rental properties:
Depreciation and amortization 1,407,000 1,313,000
Operating 2,374,000 2,399,000
Other operating expenses 1,246,000 1,278,000
Provision for losses on mortgage
loans and related investments - 3,000,000
---------- ----------
12,826,000 14,829,000
---------- ----------
Loss before reorganization items (3,980,000) (5,252,000)
Reorganization items:
Professional fees (676,000) (245,000)
---------- ----------
Net loss $(4,656,000) $(5,497,000)
---------- ----------
---------- ----------
PER SHARE:
Net loss $(.41) $(.50)
----- -----
----- -----
Weighted average number of common
shares outstanding 11,226,000 11,076,000
</TABLE>
See accompanying notes.
3
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,656,000) $ (5,497,000)
----------- ------------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation on real estate 1,407,000 1,313,000
Provision for losses - 3,000,000
Increase (decrease) in payables & accrued expenses 7,382,000 (892,000)
Decrease (increase) in receivables and other assets (720,000) 36,000
Net change in interest reserves, deferred income (16,000) (797,000)
Other (48,000) -
----------- ------------
Total adjustments 8,005,000 2,660,000
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,349,000 (2,837,000)
----------- ------------
Cash flows from investing activities:
Investments in real estate:
Properties acquired through foreclosure (1,110,000) (1,143,000)
In-substance foreclosures (671,000) (391,000)
Real estate equities (434,000) (440,000)
Advances on mortgage loans - (4,000)
Principal repayments on mortgage loans 227,000 16,430,000
Sale of foreclosed property 5,511,000 1,764,000
Repayment of in-substance foreclosure 2,338,000 192,000
----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,861,000 16,408,000
----------- ------------
Cash flows from financing activities:
Payment of Senior Secured Notes - (22,000,000)
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - (22,000,000)
----------- ------------
Net increase (decrease) in cash and cash equivalents 9,210,000 (8,429,000)
Cash and cash equivalents at beginning of period 11,451,000 12,453,000
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20,661,000 $ 4,024,000
----------- ------------
----------- ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTMENT AND
FINANCING ACTIVITIES:
Charge offs to allowance for losses $ 215,000 $ 6,680,000
----------- ------------
----------- ------------
Transfer of mortgage loans to investment in partnerships $ - $ 4,355,000
----------- ------------
----------- ------------
</TABLE>
See accompanying notes.
4
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended December 31, 1993 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common Shares Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period 11,226,000 $11,226,000 $182,375,000 $(151,978,000) $ 41,623,000
Net loss (4,656,000) (4,656,000)
---------- ----------- ------------ ------------- ------------
Balance, end of
period 11,226,000 $11,226,000 $182,375,000 $(156,634,000) $ 36,967,000
---------- ----------- ------------ ------------- ------------
---------- ----------- ------------ ------------- ------------
</TABLE>
See accompanying notes.
5
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 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 United States 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 (the "1992 Restructuring") with
the unanimous consent of the creditors. The debt is now governed by
an indenture (the "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"). Pursuant to the 1992 Restructuring,
the Trust entered into the Indenture governing the Senior Notes with
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 (the "Collateral
Agents") as collateral agents (as amended, the "Collateral Agreement")
and amended the plan of reorganization confirmed in February 1991 in
the Trust's Chapter 11 bankruptcy proceeding (the "1991 Plan").
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 December 31, 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% at June 30, and September 30, 1993 and 358% at
December 31, 1993 and a ratio of earning assets to outstanding
securities of 113% at June 30, and September 30, 1993 and 116% at
December 31, 1993. The Trust failed to meet each of these ratios,
constituting events of default under the Indenture. 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.
6
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. However, commencing
at about the time of the August 1993 agreement in principle, 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. 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 Senior Notes, any
action by the Trust to implement the Trust's original agreed
restructuring has been postponed and it presently appears unlikely
that the terms of the August 1993 agreement in principle will be
implemented.
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 a financial advisor which immediately commenced its
analysis of the financial condition and operations of the Trust and
the proposed agreement in principle.
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
7
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 (and the Collateral Agents) 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. On or about February 3, 1994, the
Trust and the Indenture Trustee and Collateral Agents reached further
understanding regarding the Trust's use of cash and administration of
its assets in the absence of a continued or extended Standstill
Period. Pursuant to the understanding, which is terminable at will by
the Indenture Trustee or Collateral Agents, the Trust will continue to
use its cash on an ad hoc basis, subject to Indenture Trustee and
Collateral Agent approval, and the Trust will administer its assets as
if no default had occurred and was continuing. There can be no
assurance that the Indenture Trustee will not terminate the
understanding or 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 and the Collateral Agents 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.
Throughout the first quarter of fiscal 1994 the Trust's management and
advisors continued discussions with the principal holders of the
Senior Notes and their representatives to explore various alternatives
for restructuring the Senior Notes. These discussions are continuing
into the second quarter of fiscal 1994. If agreement on such a
restructuring cannot be reached, or if the holders of Secured Notes or
the Indenture 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.
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
reclassification that have been made to reflect the indebtedness as
extended under the 1991 Plan and the Senior Note Indenture. The
conditions noted above raise substantial doubt about the Trust's
ability to continue as a going concern. These financial statements do
not include any adjustments that would be required should the Trust be
unable to continue as a going concern. These financial statements
also do not include any adjustments that could be required as a result
of the restructuring process.
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
8
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, "Significant Accounting Policies - 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. For the fiscal year ended
September 30, 1993 and the quarter ended December 31, 1993, 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 preserves 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.
9
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 both December 31,
and September 30, 1993. 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, "Significant
Accounting Policies - Basis of Financial Statement Presentation and
Plan of Reorganization." Further adjustments may also be necessary as
a result of the restructuring negotiations.
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, "Significant
Accounting Policies - Basis of Financial Statement Presentation and
Plan of Reorganization."
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 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.
10
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include short-
term investments (high grade commercial paper of $4.9 million at
December 31, 1993) maturing in 3 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 $1.6 million related to borrowers' deposits. See Note 1,
"Significant Accounting Policies - Basis of Financial Statement
Presentation and Plan of Reorganization" and Item 3, "Defaults Upon
Senior Securities" 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 $10
million to Senior Note holders.
NOTE 2. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE
The following table summarizes the Trust's mortgage loan portfolio:
<TABLE>
<CAPTION>
December 31, 1993 September 30, 1993
----------------------- ----------------------
Number of Carrying Number of Carrying
Type of Underlying Security Investments Amount Investments Amount
- --------------------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
Apartments 3 $ 5,372 3 $ 5,391
Residential/Condominium* 9 1,697 10 1,841
Office Buildings 1 1,086 1 1,135
Industrial Buildings 10 44,072 10 44,086
Research & Development 5 25,946 5 25,942
Retail Buildings 6 22,729 6 22,738
Hotels/Motels 1 3,060 1 3,060
--- -------- --- --------
Total 35 $103,962 36 $104,193
--- -------- --- --------
--- -------- --- --------
_____________
<FN>
* Includes 106 mortgage end-loans on 9 projects at December 31,
1993 and 107 mortgage end-loans on 10 projects at September 30,
1993.
</TABLE>
At December 31, 1993, the Trust had undisbursed commitments of
$1,195,000, all of which represents additional advances on partially
funded mortgage loans.
As of December 31, 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.
11
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (Continued)
At December 31, 1993 and 1992, loans totalling $25,107,000 and
$36,606,000, 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 December 31, 1992, earning mortgage loans totalling $61,375,000 had
been subject to contractual interest rate modifications due to
financial difficulties of the borrower. No interest rate
modifications were made on mortgage loans during fiscal 1993 or for
the quarter ended December 31, 1993.
The following table summarizes the Trust's investment in in-substance
foreclosures:
<TABLE>
<CAPTION>
December 31, 1993 September 30, 1993
----------------------- ----------------------
Number of Carrying Number of Carrying
Type of Property Investments Amount Investments Amount
- ---------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
EARNING:
Office Buildings 2 $12,810 2 $12,831
Industrial Buildings 2 10,616 1 4,901
Retail Buildings 3 28,397 3 28,238
Apartments 1 6,687 1 6,689
Research & Development Bldgs. 3 17,099 3 17,048
--- ------- --- -------
Total Earning 11 75,609 10 69,707
--- ------- --- -------
NON-EARNING:
Office Buildings 1 7,452 1 7,433
Industrial Buildings 2 2,296 3 7,576
Retail Buildings - - 1 2,453
--- ------- --- -------
Total Non-Earning 3 9,748 5 17,462
--- ------- --- -------
Total 14 $85,357 15 $87,169
--- ------- --- -------
--- ------- --- -------
</TABLE>
12
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 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 $8,333,000 at December
31, 1993 and $7,800,000 at September 30, 1993:
<TABLE>
<CAPTION>
December 31, 1993 September 30, 1993
----------------------- ----------------------
Number of Carrying Number of Carrying
Type of Property Investments Amount Investments Amount
- ---------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
Office Buildings 4 $26,468 4 $26,504
Industrial Buildings 1 6,580 1 6,626
Retail Buildings 1 24,074 1 24,083
--- ------- --- -------
Total 6 $57,122 6 $57,213
--- ------- --- -------
--- ------- --- -------
</TABLE>
The Trust reviews real estate equities (held for long-term investment)
for permanent impairment. For the year ended September 30, 1993, the
Trust charged off $2.4 million against the allowance for losses on one
of its office building investments due to permanent impairment. There
were no charge-offs due to permanent impairment for the quarter ended
December 31, 1993.
The following table summarizes the Trust's investment in properties
acquired through foreclosure and held for sale, net of accumulated
depreciation of $6,080,000 at December 31, 1993 and $6,143,000 at
September 30, 1993:
<TABLE>
<CAPTION>
December 31, 1993 September 30, 1993
----------------------- ----------------------
Number of Carrying Number of Carrying
Type of Property Investments Amount Investments Amount
- ---------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
EARNING
Apartments 3 $17,812 4 $18,631
Office Buildings 5 13,182 5 11,283
Industrial Buildings 6 25,682 5 18,399
Retail Buildings 1 1,420 1 1,394
Research & Development Bldgs. 1 2,883 1 2,879
--- ------- --- -------
Total Earning 16 60,979 16 52,586
--- ------- --- -------
NON-EARNING
Office Buildings 2 5,668 3 7,563
Industrial Buildings 4 13,261 5 15,796
Retail Buildings 1 3,637 3 12,775
--- ------- --- -------
Total Non-Earning 7 22,566 11 36,134
--- ------- --- -------
Total 23 $83,545 27 $88,720
--- ------- --- -------
--- ------- --- -------
</TABLE>
13
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ALLOWANCE FOR LOSSES
The changes in the allowance for losses for the three months ended
December 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
12/31/93 12/31/92
-------- --------
(Amounts in Thousands)
<S> <C> <C>
Balance at beginning of period $11,808 $19,353
Provisions charged to expense - 3,000
------- -------
11,808 22,353
Less charges against allowance 215 6,680
------- -------
Balance at end of period $11,593 $15,673
------- -------
------- -------
</TABLE>
Approximately $6,195,000 and $1,697,000 of the allowance at December
31, 1993 and 1992, respectively, are applicable to properties acquired
through foreclosure and held for sale.
NOTE 4. SENIOR NOTES
SENIOR SECURED NOTES - The lack of liquidity in the commercial real
estate markets continued during the quarter ended December 31, 1993.
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 or the $33.8
million required principal payment due December 31, 1993. The Trust
also did not make the $6.6 million interest payment due December 31,
1993. The average borrowing rates for the quarters ended December 31,
1993 and 1992, respectively, were 9.87% and 8.54%. At December 31,
1993, the average 9.87% interest rate on the Senior Notes was 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.
In addition, based on financial results at December 31, 1993 the Trust
was in violation of certain financial covenants in its indenture
relating to the ratio of outstanding securities to the Trust's capital
base and the ratio of earning assets to outstanding securities.
Failure to satisfy these covenants constitute additional events of
default under the Indenture. In addition, at December 31, 1993, the
Trust's non-performing assets (as defined in the Indenture) exceeded
the limits prescribed in the Indenture. In addition to constituting
an event of default, the Trust is obligated under the Indenture to
pay to the holders of Senior Notes a penalty equal to 1.5% of such
excess of non-performing assets, or a payment of approximately
$183,000 - See Item 3, "Defaults Upon Senior Securities" for
additional
14
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. SENIOR NOTES (Continued)
information regarding 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 December 31, 1993. The
contractual interest rate on this loan is 7-1/2% (Prime + 1-1/2%,
floor of 9%) at December 31, 1993, and the loan matures in April 1994.
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 requires disclosure of fair value information about financial
instruments, both assets and liabilities and 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 December 31, 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.
15
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Trust's financial instruments at
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
-------- ----------
(Amounts in Thousands)
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 20,661 $ 20,661
Mortgage loans and long-term receivable (net of
allowance for possible losses) 103,962 103,513
FINANCIAL LIABILITIES:
Senior Notes (290,000) (216,100)
Loan on equity investment (17,578) (17,578)
Off-balance sheet financial instruments:
Unfunded loan commitments - (1,195)
</TABLE>
NOTE 6. SHARE OPTION PLAN
As of December 31, 1993, options to purchase 426,000 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 7, expire five years from
the date of grant but do not vest until three years from the date of
grant. Options to purchase 26,500 Common Shares at a price from $2.50
to $14.50 terminated during the three months ended December 31, 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 three months ended December 31,
1993, no Options were exercised.
NOTE 7. 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
16
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. EMPLOYEE RETENTION PLAN (Continued)
$329 million resulting in an incentive bonus pool of $160,000. On
September 16, 1992, 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.
During the quarter ended December 31, 1993, the Committee approved the
payment of a discretionary bonus totalling $123,000 for certain
officers of the Trust.
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 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).
NOTE 8. ISSUANCE OF SHARES
Effective April 1, 1992, the Trust terminated its Dividend
Reinvestment and Share Purchase Plan.
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 9, "Litigation."
NOTE 9. 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
17
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. LITIGATION (Continued)
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.
18
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10-Q
Item 2. 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 (the "1991 Plan") 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 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 (the "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 December 31, 1992, debt outstanding (composed of the Senior
Notes) was reduced to $290 million, the maximum debt level permitted under the
Indenture on that date.
Due to continued lack of liquidity in the real estate marketplace, the Trust did
not have sufficient funds to meets its $20 million required principal payment
due June 30, 1993. The Trust did, however, pay all of the interest and fees
due through September 30, 1993 on its outstanding debt. The Trust's failure to
make the June 30 principal payment constituted an event of default under the
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 Indenture effective March 31, June 30, September 30, and
December 31, 1993, constituting additional events of default. Certain of these
covenants were previously amended in or prior to the Trust's consensual
restructuring of its debt in July 1992.
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. The Trust did not
make those required payments. 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. 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. However, 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 Senior Notes, any action by the Trust to implement the Trust's
original agreed restructuring has been postponed and it presently appears
unlikely that the terms of the August 1993 agreement in principle will be
implemented.
In October 1993, certain investing holders involved in the trading of Senior
Notes 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 a financial advisor who immediately commenced its
analysis of the financial condition and operations of the Trust and the proposed
agreement in principle. In December 1993 as the investing holders' initial due
diligence review was being finalized, the investing holders, members of the
Trust's official creditors' committee, management and the respective advisors
recommenced substantive negotiations for a restructuring of the Senior Notes.
19
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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. See Note 1 of the Notes to Financial Statements and
Item 3, "Defaults Upon Senior Securities" for information regarding additional
events of default under the Indenture and the enforcement action taken to date
in respect thereof.
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, or if the holders of
the Secured Notes or the Indenture Trustee or the Collateral Agents 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 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. Subsequent to the expiration of
the Standstill Period, on or about December 8, 1993, the Indenture Trustee
(and the Collateral Agents) 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. On or about February 3, 1994, the Trust and
the Indenture Trustee and Collateral Agents reached further understanding
regarding the Trust's use of cash and administration of its assets in the
absence of a continued or extended Standstill Period. Pursuant to the
understanding, which is terminable at will by the Indenture Trustee or
Collateral Agents, the Trust will continue to use its cash on an ad hoc basis,
subject to Indenture Trustee and Collateral Agent approval, and the Trust will
administer its assets as if no default had occurred and was continuing. 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. The
Trust intends, therefore, to continue to operate its business and to seek Senior
Note holder consent as such consent is required. Although the Trust believes
that such consents, if requested, would be in the best interest of the Trust,
it's 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 the Trust to explore other alternatives, including seeking
relief under Chapter 11.
At December 31, 1993, the Trust had cash and cash equivalents of $20.7 million.
Included in cash and cash equivalents are $1.3 million of restricted cash which
represents the funding of the employee retention plan and $1.6 million related
to borrowers' deposits. The Trust's unfunded loan commitments totalled $1.2
million at December 31, 1993. Under the 1991 Plan and the Indenture, the Trust
has been permitted to fund its existing contractual obligations, but may not
make new investments.
20
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - QUARTER ENDED DECEMBER 31, 1993 VS. QUARTER ENDED
DECEMBER 31, 1992 - Net loss for the quarter ended December 31, 1993 was
$(4,656,000) or $(.41) per share compared to a net loss of $(5,497,000) or
$(.50) per share for the quarter ended December 31, 1992. The quarter ended
December 31, 1992 included a provision for losses of $3,000,000 or $.27 per
share compared to no provision for the quarter ended December 31, 1993.
Interest and fee income on mortgage loans decreased $930,000 to $3,998,000 for
the current quarter from $4,928,000 for the quarter ended December 31, 1992.
The decrease was due primarily to a reduction in earning mortgage loans.
Rental income increased $190,000 to $4,733,000 in the quarter ended December 31,
1993 from $4,543,000 for the quarter ended December 31, 1992. The increase in
rental income primarily results from growth of operations of investments in real
estate equities and properties acquired through foreclosure and held for sale.
Interest expense increased $960,000 to $7,799,000 in the current quarter from
$6,839,000 for the quarter ended December 31, 1992. This was due primarily to
an increase in the average borrowing rate from 8.54% for the quarter ended
December 31, 1992 to 9.87% for the quarter ended December 31, 1993. Offsetting
this increase was a decrease in average borrowings from $302.5 million for the
quarter ended December 31, 1992 to $290 million for the quarter ended December
31, 1993.
Operating expenses of rental properties and depreciation and amortization
charges increased $69,000 to $3,781,000 for the quarter ended December 31, 1993
from $3,712,000 for the quarter ended December 31, 1992, primarily as a result
of the growth of operations of investment in real estate properties owned.
RESULTS OF OPERATIONS - QUARTER ENDED DECEMBER 31, 1993 VS. QUARTER ENDED
SEPTEMBER 30, 1993 - Net loss for the quarter ended December 31, 1993 was
$(4,656,000) or $(.41) per share compared to a net loss of $(23,327,000) or
$(2.10) per share for the quarter ended September 30, 1993. The quarter ended
September 30, 1993 included a provision for losses of $15,000,000 or $1.34 per
share compared to no provision for the quarter ended December 31, 1993.
Interest and fee income on mortgage loans decreased $305,000 to $3,998,000 for
the quarter ended December 31, 1993 from $4,303,000 for the quarter ended
September 30, 1993. The decrease was due primarily to a reduction in earning
mortgage loans which totalled $94 million at December 31, 1993 compared to $99
million at September 30, 1993.
Rental income increased $366,000 to $4,733,000 in the quarter ended December 31,
1993 from $4,367,000 for the quarter ended September 30, 1993. The increase was
due primarily to the continuing operating growth of operations of investments in
real estate equities and properties acquired through foreclosure and held for
sale.
Interest expense decreased $285,000 to $7,616,000 in the current quarter from
$7,901,000 for the quarter ended September 30, 1993. This was due primarily to
the charge off of the remainder of the unamortized cost of restructuring of the
Senior Notes during the quarter ended September 30, 1993.
NON-EARNING LOANS AND INVESTMENTS - At December 31, 1993, the Trust's non-
earning loans, non-earning in-substance foreclosures and non-earning properties
acquired through foreclosure
21
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
and held for sale were $41,822,000, representing 12.31% of invested assets
compared to $58,804,000 (16.94%) at September 30, 1993 and $30,278,000 (7.54%)
at December 31, 1992.
22
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10-Q
PART II
Item 3 - DEFAULTS UPON SENIOR SECURITIES
The Trust did not make its $33.75 million required principal payment
due December 31, 1993 on the Senior Notes. Also, payment of $6.6
million in interest due December 31, 1993 on the Senior Notes was not
made.
In addition, based on financial results at December 31, 1993 the Trust
was in violation of certain financial covenants in the Indenture
relating to the ratio of outstanding securities to the Trust's capital
base and the ratio of earning assets to outstanding securities. Under
the financial covenants of the Indenture, the Trust was required to
maintain a ratio of outstanding indenture securities to its capital
base (as defined in the Indenture) of 358% at December 31, 1993 and a
ratio of earning assets to outstanding securities of 116% at December
31, 1993. Failure to satisfy these covenants constitute additional
events of default under the Indenture. In addition, at December 31,
1993, the Trust's non-performing assets (as defined in the Indenture)
exceeded the limits prescribed in the Indenture. In addition to
constituting an event of default, the Trust is obligated under the
Indenture to pay to the holders of Senior Notes a penalty equal to
1.5% of the excess of non-performing assets, or a payment of
approximately $183,000. There are also outstanding certain other
events of default under the Indenture. See Note 1 of the Notes to
the Financial Statements for additional information relating to such
defaults.
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
(and the Collateral Agents) 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. On or about February 3, 1994, the
Trust and the Indenture Trustee and Collateral Agents reached further
understanding regarding the Trust's use of cash and administration of
its assets in the absence of a continued or extended Standstill
Period. Pursuant to the understanding, which is terminable at will by
the Indenture Trustee or Collateral Agents, the Trust will continue to
use its cash on an ad hoc basis, subject to Indenture Trustee and
Collateral Agent approval, and the Trust will administer its assets as
if no default had occurred and was continuing. There can be no
assurance that the Indenture Trustee will not terminate the
understanding or 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 and the Collateral Agents to
consent to necessary use of cash or releases
23
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10-Q
Item 3 - DEFAULTS UPON SENIOR SECURITIES (Continued)
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.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibits are as set forth in the "INDEX TO EXHIBITS" on page 26.
(B) REPORTS ON FORM 8-K
On October 11, 1993, November 29, 1993 and December 17, 1993, the
Trust filed reports on Form 8-K dated October 5, 1993, November
19, 1993 and December 7, 1993, respectively, reporting
information under Item 5 - Other Events.
24
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORTGAGE AND REALTY TRUST
By /s/ Victor H. Schlesinger
-------------------------
Victor H. Schlesinger
Chairman
By /s/ Daniel F. Hennessey
-------------------------
Daniel F. Hennessey
Treasurer
DATE: February 11, 1994
25
<PAGE>
MORTGAGE AND REALTY TRUST FORM 10-Q
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
11* Schedule of Net Income (Loss) Per Share - Assuming Full Dilution
- ----------------
* Exhibit filed with this Form 10-Q.
26
<PAGE>
Exhibit 11
MORTGAGE AND REALTY TRUST
SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION
FOR THE QUARTERS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1992
----------- ----------
<S> <C> <C>
BASIS:
Net (loss) $ (4,656,000) $ (5,497,000)
Average common shares outstanding 11,226,000 11,076,000
20% limitation on assumed repurchase 2,245,000 2,215,000
Market price at the end of the period $.50 $1.25
Options outstanding 426,000 584,500
COMPUTATION:
Proceeds:
Options 426,000 584,500
Average exercise price X $5.37 X $8.15
------------ -----------
$ 2,288,000 $ 4,764,000
------------ -----------
------------ -----------
Adjustment of proceeds:
Purchase of outstanding common shares
at market value $ 1,123,000 $ 2,769,000
Retirement of debt 1,165,000 1,995,000
------------ -----------
$ 2,288,000 $ 4,764,000
------------ -----------
------------ -----------
Adjustment of net income (loss):
Net (loss) before gain on sales of
real estate $ (4,656,000) $ (5,467,000)
Interest reduction 29,000 39,000
------------ -----------
Adjusted net income (loss) $ (4,627,000) $ (5,428,000)
------------ -----------
------------ -----------
Adjustment of shares outstanding:
Average shares outstanding 11,226,000 11,076,000
Net shares repurchased (1,819,000) (1,631,000)
------------ -----------
Adjusted shares outstanding (basis for
computation of net income per share -
assuming full dilution) 9,407,000 9,445,000
------------ -----------
------------ -----------
Fully diluted earnings per share:
Net (loss) $(.49) $(.57)
----- -----
----- -----
</TABLE>
NOTE - Primary earnings per share is based on the average number of shares
outstanding during the period.
