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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, 1994
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 19027
ELKINS PARK, PENNSYLVANIA (Zip code)
(Address of principal
executive offices)
</TABLE>
Registrant's telephone number, including area code: 215-881-1525
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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 December 14, 1994, computed by reference to the closing sale
price of such shares as reported in the Consolidated Transaction Reporting
System, was $1,750,000. The number of Common Shares outstanding at December 14,
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 ___
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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<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 1995 to postpone the meeting
pending any restructuring agreed upon with the holders of the Trust's Senior
Secured Uncertificated Notes due 1995 (the "Senior Notes"). 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 United States Code, as amended (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, the markets continued to
materially deteriorate. Despite these conditions, the Trust was able to make all
required interest payments and to exceed the required amortization payments,
reducing the debt 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 acquisition
cost.
1
<PAGE>
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.
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.
1992 RESTRUCTURING
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 the 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 the official creditors' committee to develop a prudent
rescheduling of such debt. 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").
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
(the
2
<PAGE>
restructuring fee) 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 (as amended, the "Collateral Agreement") with the Indenture Trustee and
William J. Wade, as collateral agents (the "Collateral Agents"), 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 September 30, 1994 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, 1994 was 2.75%, with the next scheduled date for an increase in
the rate being January 1, 1995. 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 failed to improve
or otherwise substantially rebound. 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 years ended September 30, 1993 and
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 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; another $6,400,000 in
interest was due on March 31, 1994; an additional $30,000,000 in principal
(taking into account permitted deferrals) and $7,200,000 in interest was due on
June 30, 1994; and another $7,900,000 in interest was due on September 30, 1994.
Consistent with the then ongoing negotiation with the principal holders of the
3
<PAGE>
Senior Notes and an agreement in principal reached in August 1993 (see
"1993-1994 Negotiations With the Creditors' Committee" below), the Trust did not
pay the interest or principal due at December 31, 1993, constituting additional
events of default under the Indenture. The Trust currently has no agreement with
any holders of Senior Notes that it will not pay interest, principal or other
amounts due or to become due on the Senior Notes; however, the Trust has
continued to suspend payments on the Senior Notes. Because the Trust did not
make otherwise required payments on June 30, 1993, December 31, 1993, March 31,
1994, June 30, 1994 and September 30, 1994, at the end of the first quarter of
fiscal 1994 (ending December 31, 1993) the Trust held approximately $17.8
million in available cash (as defined in the Indenture), at the end of the
second quarter of fiscal 1994 (ending March 31, 1994) the Trust held
approximately $32.8 million in available cash, at the end of the third quarter
of fiscal 1994 (ending June 30, 1994) the Trust held approximately $53.2 million
in available cash, and at the end of fiscal year 1994 (ending September 30,
1994) the Trust held approximately $57.3 million in available cash. 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. 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 or
exercised any other remedy available upon the occurrence of the events of
default described above. 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. The Company believes
that no 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. On or about February 3, 1994, the Company 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 new 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. In May 1994, the Trust's bank notified the Trust
that it intended to close all of the Trust's operating accounts with the bank on
May 31, 1994. Consequently, the Trust established new operating accounts at
Wilmington Trust Company and transferred all of its bank balances to such
accounts. Concurrently, the Trust and the Indenture Trustee entered into a First
Supplemental Indenture, dated as of May 25, 1994, amending the Indenture to
provide for the new accounts. The Trust also entered into a Deposit Account
Security Agreement relating to such accounts and supplemented the February
operating arrangement with the Indenture Trustee and the Collateral Agents to
provide for the new accounts. Although the Trust has entered into the First
Supplemental Indenture and amended its operating arrangement with the Indenture
Trustee and the Collateral Agents, there can be no assurance that the Indenture
Trustee or Collateral Agents will not terminate the amended cash use arrangement
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 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 Bankruptcy Code.
4
<PAGE>
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.
1993-1994 NEGOTIATIONS WITH THE OFFICIAL CREDITORS' COMMITTEE
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, 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 three such investors made formal
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
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. 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
5
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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.
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 September 30, 1994 in excess of 33 1/3% of the Senior Notes (the "33 1/3%
Holder"). 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 was
suspended. In or about September 1994, another of the members of the official
creditors' committee sold all of its Senior Notes. With that sale, the only
remaining member of the official creditors' committee was the 33 1/3% Holder. On
September 9, 1994, the Trust's counsel received telephonic notice from counsel
to the official creditors' committee that it believed that the official
creditors' committee had ceased to operate.
NEGOTIATIONS REGARDING A RESTRUCTURING
Throughout the second and third quarters of fiscal 1994, the Trust's
management and advisors continued discussions with certain principal holders of
the Senior Notes and their representatives to explore various alternatives for
restructuring the Senior Notes. In March 1994, the principal holders requested
that the Trust agree to pay certain fees and expenses of legal counsel to the
principal holders. The Trust agreed, and in March 1994, the principal holders
retained counsel to advise them in the Trust's financial restructuring.
Thereafter, in June 1994, the principal holders requested and the Trust agreed
to pay certain fees and expenses of a new financial advisor to the principal
holders. The negotiations among the Trust, the various creditor constituencies
and other interested parties in the Trust's financial restructuring continued
into the fourth quarter of fiscal 1994. If a restructing cannot be consummated,
or if the holders of Senior 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 Bankruptcy
Code.
On November 17, 1994, the Trust issued a press release announcing that it
had reached an agreement in principle with a substantial number of holders of
its Senior Notes on the terms of a restructuring of the Senior Notes. A copy of
the press release and the term sheet to the restructuring were attached as
exhibits to the Current Report on Form 8-K filed on November 28, 1994 with the
Securities and Exchange Commission (the "Commission").
Pursuant to the agreement in principle, holders of the Senior Notes in the
aggregate principal amount of $290 million plus accrued interest of $41.7
million through December 31, 1994 will receive under a prepackaged plan of
reorganization under chapter 11 of the Bankruptcy Code $110 million of new
senior secured notes due 2002, approximately $50 million in cash and 97% of the
restructured equity of the Trust (or substantially all the restructured equity
if holders of the Trust's outstanding common shares do not vote to accept the
prepackaged plan). If holders of the outstanding common shares vote to accept
the prepackaged plan, such holders will retain 3% of the equity of the
restructured Trust. The agreement in principle anticipates that the new senior
secured notes will mature in 2002 and bear interest at the rate of 11 1/8% per
annum. It is also anticipated that holders of unsecured claims will receive cash
in the allowed amount of their claims. It is contemplated that the Trust will
prepare a "shelf" registration statement for the new securities issued pursuant
to the prepackaged plan.
6
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The agreement to pursue the restructuring proposal is subject to a number of
conditions and the Trust intends to effect the restructuring through a
prepackaged chapter 11 bankruptcy. At this time there can be no assurance that
the conditions to consummation of the proposed restructuring will be satisfied.
Other details of the agreement, including the additional conditions to
commencement and consummation of the restructuring, have not been finalized
pending the filing of proxy solicitation materials with the Commission and
distribution of a disclosure statement for the solicitation of votes for the
prepackaged plan to holders of the Trust's outstanding securities. No consents
will be accepted other than pursuant to such disclosure statement and proxy
statement. The advisors to the Trust and the various holders of Senior Notes are
negotiating additional terms of the new debt securities to be received by the
Senior Note holders under the prepackaged plan, as well as the formal
documentation necessary to the restructuring. Details of the agreement in
principle will be disclosed in that formal documentation.
OTHER EVENTS
In a letter dated November 29, 1994, the New York Stock Exchange (the
"NYSE") notified the Trust that in light of the Trust's present financial
condition, as well as its November 17, 1994 press release regarding the Trust's
intention to file a prepackaged plan of reorganization under chapter 11 of the
Bankruptcy Code, the NYSE is reviewing the continued listing of the Trust.
Although the Trust is working with representatives of the NYSE to allow the
Trust to continue to be listed, there can be no assurance that the NYSE will not
determine to commence a formal delisting action.
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 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, 1994, the Trust held
investments in mortgage loans, investments in real estate and other interests in
real properties located in 19 states.
Total loans and investment commitments outstanding at September 30, 1994
were $310,588,000 of which $615,000 remained to be disbursed.
The following pages contain summaries of the Trust's commitments and
investments at September 30, 1994 and certain information pertaining to
non-earning loans, delinquent earning loans, non-earning in-substance
foreclosures and non-earning foreclosed properties.
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MORTGAGE AND REALTY TRUST
SUMMARY OF INVESTMENTS AT SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
AMOUNT
AMOUNT COMMITTED OUTSTANDING
---------------- ----------------
<S> <C> <C>
TYPE OF INVESTMENTS
SHORT AND INTERMEDIATE-TERM
Mortgage Loans:
Standing loans............................................................ $ 62,469,000 $ 61,854,000
Properties Acquired Through Foreclosure and Held for Sale:
Earning................................................................... 68,437,000 68,437,000
Non-earning............................................................... 32,282,000 32,282,000
In-Substance Foreclosures:
Earning................................................................... 62,405,000 62,405,000
Non-earning............................................................... 10,228,000 10,228,000
Notes Receivable............................................................ 760,000 760,000
---------------- ----------------
Total Short and Intermediate-Term....................................... 236,581,000 235,966,000
---------------- ----------------
LONG-TERM
Participating Loans:
Participating Phase....................................................... 4,718,000 4,718,000
Amortizing Loans............................................................ 2,908,000 2,908,000
Investment in Real Estate Equities.......................................... 56,857,000 56,857,000
Investment in Partnerships.................................................. 9,524,000 9,524,000
---------------- ----------------
Total Long-Term......................................................... 74,007,000 74,007,000
---------------- ----------------
Total Invested Assets....................................................... $ 310,588,000 309,973,000
----------------
----------------
Less Deferred Fees........................................................ (496,000)
----------------
Total Invested Assets....................................................... $ 309,477,000
----------------
----------------
</TABLE>
MORTGAGE AND REALTY TRUST
NON-EARNING IN-SUBSTANCE FORECLOSURES
AND NON-EARNING FORECLOSED PROPERTY HELD FOR SALE
(BY GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE)
SEPTEMBER 30, 1994
(000 OMITTED)
<TABLE>
<CAPTION>
RETAIL INDUSTRIAL OFFICE
CENTER CENTER BUILDING TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
California.......................................................... $ -- $ 10,513 $ 10,031 $ 20,544
Massachusetts....................................................... 5,039 2,712 1,027 8,778
New Hampshire....................................................... -- 5,157 -- 5,157
New Jersey.......................................................... -- -- 5,392 5,392
Pennsylvania........................................................ -- 2,609 -- 2,609
--------- --------- --------- ---------
$ 5,039 $ 20,991 $ 16,450 $ 42,480
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
8
<PAGE>
MORTGAGE AND REALTY TRUST
GEOGRAPHIC DISTRIBUTION OF INVESTMENTS BY COMMITTED AMOUNTS
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
RETAIL RESEARCH &
STATE APARTMENTS HOTEL INDUSTRIAL OFFICE RESIDENTIAL BUILDINGS DEVELOPMENT TOTALS %
- ------------------ ----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona........... $ 4,384,479 $ 4,384,479 1.41%
California........ $ 254,283 41,353,733 $23,332,370 $ 74,197 $62,855,920 $24,132,073 152,002,576 49.07%
Colorado.......... 37,924 204,931 242,855 0.08%
Delaware.......... 204,312 204,312 0.07%
Georgia........... 62,752 62,752 0.02%
Indiana........... 4,315,288 4,315,288 1.39%
Maine............. 7,690,408 7,690,408 2.48%
Maryland.......... 9,211,305 816,481 10,027,786 3.24%
Massachusetts..... 5,420,203 5,282,263 3,639,943 14,342,409 4.63%
Michigan.......... 6,694,782 6,694,782 2.16%
Minnesota......... 2,341,987 2,840,655 5,182,642 1.67%
Missouri.......... 9,006,582 9,006,582 2.91%
Nevada............ $3,060,000 3,060,000 0.99%
New Hampshire..... 5,157,610 1,398,963 6,556,573 2.12%
New Jersey........ 5,391,693 5,391,693 1.74%
Oregon............ 6,976,545 6,976,545 2.25%
Pennsylvania...... 24,108,284 21,077,135 13,856,155 9,872,505 68,914,079 22.24%
Virginia.......... 138,676 138,676 0.04%
Washington........ 4,633,272 4,633,272 1.49%
----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ -------
Totals............ $27,961,343 $3,060,000 $87,399,568 $71,271,311 $1,334,342 $81,955,912 $36,845,233 $309,827,709
----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------
----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------
Percentage........ 9.02% 0.99% 28.20% 23.00% 0.43% 26.47% 11.89% 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, 1994, there were no loans which were so delinquent as to principal and/or
interest.
NON-EARNING MORTGAGE LOANS -- At September 30, 1994, there were no loans
classified as non-earning.
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. In-substance
foreclosures are classified as non-earning if they do not produce a minimum
annualized return of 5% or greater cash flow yield for two consecutive calendar
quarters. At September 30, 1994, there were two loans classified as non-earning
in-substance foreclosed which totalled $10,198,000. Descriptions of the two
investments are as follows:
(1) The Trust has a first mortgage loan on six industrial buildings
totalling 157,480 square feet located in Chula Vista, California. The
loan was classified as non-earning in-substance foreclosed in April 1994.
The property is currently 74% leased and occupied.
(2) The Trust has a first mortgage loan on 10 industrial buildings
containing 106,663 square feet located in Chino, California. The loan was
placed on non-earning status in June 1993 and reclassified as non-earning
in-substance foreclosed in September 1994. The property is currently 77%
leased and occupied.
9
<PAGE>
NON-EARNING PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE -- At
September 30, 1994, there were eleven non-earning properties acquired through
foreclosure and held for sale which totalled $32,282,000. Descriptions of the
eleven investments are as follows:
(1) 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.
(2) 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. Subsequent to September 1994, a 20
year lease with Shaw's Supermarkets, Inc. for a 65,000 square feet
supermarket anchor store was completed, with occupancy expected in
mid-1995, which will result in the project being 88% leased and occupied.
(3) 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 80% leased and occupied.
(4) The Trust had a first mortgage loan on an industrial building
containing 57,900 square feet located in Framingham, Massachusetts. The
Trust acquired title to this property in April 1992. The property is
currently 65% leased and occupied.
(5) The Trust had a first mortgage loan on two adjoining office buildings
containing 39,087 square feet located in Woodland Hills, California. The
Trust acquired title to this property in May 1992. The property is
currently 80% leased and occupied.
(6) 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 72%
leased and occupied.
(7) 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 property is 100% leased to one tenant who will begin making rental
payments in November 1994.
(8) 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.
(9) 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.
(10) The Trust had a first mortgage loan on a 2-story office building
containing 30,000 square feet located in Sudbury, Massachusetts. The
Trust acquired title to this property in June 1993. The property is
currently unleased.
(11) The Trust had a first mortgage loan on 21,600 square feet of vacant
land located in Los Angeles, California. The Trust acquired title to this
property in June 1994.
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, 1994, there were additions of $2,000,000 to the
allowance for losses and there were charges of $378,000, net of recoveries,
against the allowance.
10
<PAGE>
The amount of the allowance for losses at September 30, 1994 was $13,430,000
(4.3% 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 69 Chairman and Trustee
C. W. Strong, Jr. 65 President, Chief Executive Officer and Trustee
Executive Vice President and Chief Operating
James A. Dalton 51 Officer
Daniel F. Hennessey 53 Treasurer and Chief Financial Officer
Donald W. Burnes, Jr. 45 Senior Vice President
Douglas R. Eckard 48 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 normally 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's real estate portfolio consists primarily of equity investments
in completed, income-producing properties such as industrial/research and
development buildings, office buildings and retail buildings located primarily
in southern California and mid-atlantic states.
The Trust's real estate portfolio at September 30, 1994 (net of accumulated
depreciation) consists of the following investments:
<TABLE>
<CAPTION>
NUMBER OF INVESTMENT % OF
TYPE OF PROPERTIES PROPERTIES AMOUNT TOTAL
- ---------------------------------------------------------------- --------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Apartments...................................................... 3 $ 21,012 13%
Office Buildings................................................ 13 56,655 34%
Industrial Buildings............................................ 12 46,741 28%
Retail Buildings................................................ 4 36,707 22%
Research and Development Buildings.............................. 2 5,985 3%
--
----------- ---------
34 $ 167,100 100%
--
--
----------- ---------
----------- ---------
</TABLE>
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, 1994 for both properties was $345,000. 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."
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
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 Plan of Reorganization" under Item 1 above. Notwithstanding the confirmation
of the 1991 Plan, as of September 30, 1994, the bankruptcy court continued to
have jurisdiction to, among other things, resolve disputes that may arise under
the 1991 Plan; however, the bankruptcy case relating to the 1991 Plan was closed
on November 4, 1994 pursuant to a final order of the bankruptcy court and the
official equity security holders' committee officially disbanded on November 22,
1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
12
<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>
1994
First Quarter.................................................... $ 5/8 $ 3/8 $ -0-
Second Quarter................................................... 5/8 3/8 -0-
Third Quarter.................................................... 1/2 3/8 -0-
Fourth Quarter................................................... 1/2 1/4 -0-
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-
</TABLE>
The Trust incurred net operating losses for tax purposes in fiscal 1991,
1992, 1993 and 1994, 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 5,348 record holders of the Trust's Common Shares
at December 14, 1994.
(c) The Trust did not declare or pay any dividends during the fiscal year
ended September 30, 1994 or the fiscal year ended September 30, 1993. 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.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
MORTGAGE AND REALTY TRUST
SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Total income..................... $ 36,277,000 $ 38,342,000 $ 42,009,000 $ 56,253,000 $ 68,233,000
Interest and other operating
expenses........................ 47,668,000 43,967,000 42,077,000 51,736,000 47,601,000
Depreciation and amortization.... 5,839,000 5,500,000 4,470,000 3,062,000 2,391,000
Loss before provision for losses,
reorganization expenses and gain
on sales of real estate......... (17,230,000) (11,125,000) (4,538,000) 1,455,000 18,241,000
Provision for losses............. 2,000,000 37,000,000 32,000,000 33,000,000 23,790,000
Reorganization expenses, net..... 2,360,000 5,844,000 934,000 4,352,000 5,051,000
Gain on sale of real estate...... -- -- 244,000 244,000
Net loss......................... (21,590,000) (53,969,000) (37,472,000) (35,653,000) (10,356,000)
PER SHARE DATA
Net loss......................... $(1.92) $(4.87) $(3.38) $ (3.22) $ (.94)
Dividends........................ -0- -0- -0- -0- .45
Book value....................... 1.79 3.71 8.63 12.01 15.23
BALANCE SHEET DATA
Total assets..................... $ 364,244,000 $ 353,874,000 $ 427,268,000 $ 514,754,000 $ 595,640,000
Invested assets.................. 309,477,000 347,526,000 424,394,000 505,600,000 547,480,000
Allowance for losses............. 13,430,000 11,808,000 19,353,000 14,707,000 10,792,000
Senior Notes..................... 290,000,000 290,000,000 312,000,000 374,000,000 403,884,000
Loan on equity investment........ 17,593,000 17,572,000 15,515,000 -- --
Shareholders' equity............. 20,033,000 41,623,000 95,592,000 133,064,000 168,717,000
Debt/equity ratio (1)............ 13.97:1 7.15:1 3.30:1 2.70:1 2.21:1
<FN>
- ------------------------
(1) 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
has not been able to meet payment and other obligations on its outstanding debt.
See Item 1, "Business" for additional information regarding current debt service
requirements and events of default.
14
<PAGE>
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% at June 30, 1993 and
September 30, 1993, 358% at December 31, 1993 and March 31, 1994, and 313% at
June 30, 1994 and September 30, 1994, and a ratio of earning assets (as defined
in the Indenture) to outstanding securities of 113% at June 30, 1993 and
September 30, 1993, 116% at December 31, 1993 and March 31, 1994 and 117% at
June 30, 1994 and September 30, 1994. 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 has continued 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 Bankruptcy
Code. Although 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 defined standstill period, such standstill period expired on
December 3, 1993. The Company believes that no 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 the Trust, its shareholders and the
Senior Note holders, there can be no assurance that the Trust will obtain
sufficient consents as they are required. Currently, the Trust is in default
under the Indenture and has continued to suspend payments on the Senior Notes.
Consequently, there can be no assurance that the Indenture Trustee and the
Collateral Agents will not take remedial or enforcement action, including
acceleration of the Senior Notes and foreclosure. 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 of the Bankruptcy Code. See Item 1, "Business -- General
- -- Current Debt Service Requirements and Defaults and Forecast In Operating Cash
Flow" and "-- Subsequent Events."
At September 30, 1994, the Trust had cash and cash equivalents of $60.3
million. Included in cash and cash equivalents are $1.4 million of restricted
cash which represents the funding of the employee retention plan and $1.9
million related to borrowers' deposits. The Trust's unfunded loan commitments
totalled $615,000 at September 30, 1994.
RESULTS OF OPERATIONS -- The Trust reported a net loss for fiscal 1994 of
$21.6 million or $1.92 per share compared to a net loss of $54.0 million or
$4.87 per share for fiscal 1993 and a net loss of $37.5 million or $3.38 per
share for fiscal 1992. The 1994 loss includes a provision for losses of $2.0
million or $.18 per share and net expense for reorganization and debt
restructuring items of $2.4 million or $.21 per share compared to 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 for the 1993 loss
and a provision for losses of $32.0 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.
Interest and fee income on mortgage loans was $14.7 million for fiscal 1994
compared to $19.0 million in fiscal 1993. The decrease results primarily from a
reduction in average earning mortgage loans (including earning in-substance
foreclosures) which totalled $131.4 million at September 30, 1994 compared to
$168.7 million at September 30, 1993. Since September 30, 1993, earning mortgage
loans of approximately $13.1 million have been transferred to investment in real
estate and $25.5 million have been repaid. Interest and fee income decreased
from $26.2 million in fiscal 1992 to $19 million in fiscal 1993. The decrease
resulted primarily from repayment of earning mortgage loans and transfer of
mortgage loans to in-substance foreclosure, foreclosed properties and
investments in partnerships.
15
<PAGE>
Rental income was $18.4 million for fiscal 1994 compared to $17.4 million in
fiscal 1993 and $13.7 million in fiscal 1992. In addition to rental income, the
Trust received reimbursement of certain operating expenses totalling $1.7
million, $1.6 million and $1.3 million for fiscal 1994, 1993 and 1992,
respectively. Operating expenses and depreciation and amortization on rental
properties increased to $15.7 million for both fiscal 1994 and 1993 compared to
$12.3 million for fiscal 1992. 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.
Interest on short-term investments was $1.2 million for fiscal 1994,
$237,000 for fiscal 1993 and $537,000 for fiscal 1992. The increase was due to
the continuing accumulation of available cash. Available cash increased due to:
(1) no payment of principal and interest on the Secured Notes since September
30, 1993 and (2) a net increase of $32.4 million in cash provided by investing
activities.
Interest expense decreased from $29 million in 1992 and $28.5 million in
1993 to $33.0 million in fiscal 1994. This was due primarily to an increase in
the average borrowing rate from 8.34% in 1992 and 9.23% in 1993 to 10.73% in
1994. Offsetting the increase, the average borrowings decreased from $336.4
million in 1992 and $293.2 million in 1993 to $290 million in 1994. At September
30, 1994, the blended interest rate on the Senior Notes was 12.12%, composed of
interest at 11.50% on $200 million of Senior Notes (including default interest
at 1%) and 13.50% 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 $4.8 million for fiscal 1994 compared to $5.3
million for both fiscal 1993 and 1992. The decrease in other operating expenses
was due primarily to decreases in professional fees and expenses.
Reorganization expenses related to the Chapter 11 filing and debt
restructuring expenses were $2.4 million for the fiscal year ended September 30,
1994, which reflects professional fees incurred by the official creditors'
committee, the official equity security holders' committee and the Trust.
Reorganization expenses were $5.8 million for the fiscal year ended September
30, 1993, which reflects professional fees and restructuring fees charged off as
a result of the monetary defaults on the Senior Notes. Reorganization expenses
were $934,000 for the fiscal year ended September 30, 1992.
A $2 million provision for losses was established in the current fiscal year
compared to a provision of $37 million in 1993. A $32 million provision for
losses was established in fiscal 1992. 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 contributed in 1993 and 1992 to the establishment of 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, 1994. 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 $42.5
million at September 30, 1994 compared to $58.8 million at September 30, 1993
and $76.3 million at September 30, 1992.
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 26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<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
69 years Trustee Executive Officer (1971-1989), Chairman (1980-1990), GMAC Mortgage
1970 Corporation and predecessor companies.
C. W. Strong, Jr. President, President and Chief Executive Officer of the Trust.
65 years Trustee
1984
Jeffrey M. Bucher Trustee Of Counsel, Bryan Cave, Attorneys (January 1993-Present); Partner,
61 years Pepper, Hamilton & Scheetz, Attorneys (February 1990-December 1992);
1979 Partner, Lillick & McHose, Attorneys (July 1987-February 1990);
Director of Dai-Ichi Kangyo Bank of California.
Kent L. Colwell Trustee President of Transamerica Realty Services, Inc.; Vice President -- Real
63 years Estate Services of Transamerica Corporation.
1986
James M. Gassaway Trustee Retired; Director of Strawbridge & Clothier.
72 years
1971
John E. Krout Trustee Retired; Director of Germantown Savings Bank (1971-April 1992).
74 years
1970
Gerhard N. Rostvold Trustee Economist, Urbanomics Research Associates; Consultant to business,
75 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, 1994, 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 regular, monthly
Trustee meeting attended in person or conducted by telephone conference; $600
for each committee meeting attended in person; and $400 for any Trustee or
17
<PAGE>
committee meeting, other than the regular, monthly Trustee 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 $100 fee was payable per meeting to the chairman of any committee.
On September 20, 1989, the Trustees adopted the Pension Plan for Trustees,
effective October 1, 1989. Trustees become eligible for plan benefits upon
completion of five years of service as Trustee, including years served prior to
the plan's effective date. Under the plan, each eligible Trustee will be
entitled to a normal retirement benefit equal to the annual retainer for
Trustees at the rate in effect on the Trustee's normal retirement date or, if
earlier, the Trustee's last day of board membership. For purposes of this plan,
normal retirement date is the first day of the month following the Trustee's
75th birthday. Plan benefits will generally begin on the normal retirement date,
but eligible former Trustees may elect to have reduced payments commence up to
five years earlier. The reduction will be 10 percent for each year by which
commencement precedes the normal retirement date. Plan benefits will be paid for
a period equal to the number of years served as Trustee after January 1, 1980,
except that payments will cease upon the death of the Trustee. No other death
benefits shall become payable on behalf of any Trustee under the plan.
The following table sets forth, for the fiscal years ended September 30,
1994, 1993 and 1992, the compensation paid by the Trust to its chief executive
officer and its four next most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------
AWARDS
-------------------- PAYOUTS
ANNUAL COMPENSATION (1) RESTRICTED -------
-------------------------------------------------------- STOCK LTIP ALL OTHER
NAME AND SALARY BONUS OTHER ANNUAL AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION FISCAL YEAR ($)(2) ($) COMPENSATION ($) ($) SARS (#) ($) ($)(3)
- ----------------------- ----------- ----------- ---------- ---------------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C.W. Strong, Jr., 1994 $175,000 -- -- -- -- -- $ 3,000
President and Chief 1993 175,000 -- -- -- -- -- 3,000
Executive Officer 1992 250,000 -- -- -- 25,000 -- 3,000
Victor H Schlesinger, 1994 $100,000 -- -- -- -- -- $ 3,000
Chairman 1993 100,000 -- -- -- -- -- 3,000
1992 27,500(4) -- -- -- 23,500 -- 1,650
James A. Dalton, 1994 $188,348 $25,000(5) -- -- -- -- $ 3,000
Executive Vice 1993 181,104 20,000 -- -- -- -- 3,000
President and Chief 1992 177,511 90,000(6) -- -- 25,000 -- 3,000
Operating Officer
Daniel F. Hennessey, 1994 $129,488 $20,000(5) -- -- -- -- $ 3,000
Treasurer and Chief 1993 124,508 20,000 -- -- -- -- 3,000
Financial Officer 1992 122,038 65,000(6) -- -- 20,000 -- 3,000
Donald W. Burnes, Jr. 1994 $120,595 $30,000(5) -- -- -- -- $ 3,000
Senior Vice 1993 114,448 30,000 -- -- -- -- 3,000
President 1992 113,114 65,000(6) -- -- 15,000 -- 3,000
<FN>
- ------------------------------
(1) In the fiscal year ended September 30, 1994, 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) Includes the Trust's matching contributions under the Trust's Savings
Incentive Plan. See "Savings Incentive Plan" below.
(4) Represents fees received as Chairman and Trustee.
(5) Does not include bonus for calendar 1994 which was paid in November 1994.
The bonuses were: for Mr. Dalton $25,000; for Mr. Hennessey $20,000; and
for Mr. Burnes $25,000.
(6) Includes retention bonus of $75,000, $50,000 and $35,000 for Messrs.
Dalton, Hennessey and Burnes, respectively.
</TABLE>
18
<PAGE>
The following table sets forth aggregate option exercises during the fiscal
year ended September 30, 1994 and option values for the chief executive officer
and the four next most highly compensated executive officers as of September 30,
1994.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED SEPTEMBER 30, 1994
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
------------- -------------
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 -- -- 74,000/-0- 0/0
Daniel F. Hennessey -- -- 57,500/-0- 0/0
Donald W. Burnes, Jr. -- -- 35,000/-0- 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 on
July 20, 1994, and as may be further 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 1,000 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 can be paid as a lump sum or 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 35 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.
19
<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, 1994, 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, 12 years; Mr.
Hennessey, 23 years; Mr. Burnes, 5 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 ($9,240 in 1994). 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.
20
<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 retention bonus was paid
on February 28, 1992.
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, 1994, 1993 and 1992 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.
21
<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, 1994. 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 1991 Plan, and as amended, the Senior Notes) 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 14, 1994, 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 14, 1994. 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 3.5% 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 14, 1994
-------------------
<S> <C>
Victor H. Schlesinger.............................................................. 32,038(1)
C. W. Strong, Jr................................................................... 29,914(2)
Jeffrey M. Bucher.................................................................. 8,600(3)
Kent L. Colwell.................................................................... 11,650(3)(4)
James M. Gassaway.................................................................. 13,302(3)
John E. Krout...................................................................... 8,612(3)
Gerhard N. Rostvold................................................................ 10,648(3)
James A. Dalton.................................................................... 71,880(5)(6)
Daniel F. Hennessey................................................................ 50,569(7)
Donald W. Burnes, Jr............................................................... 35,000(8)
All Trustees and officers as a group (21 persons).................................. 397,538(9)
<FN>
- ------------------------
(1) 23,500 of the Shares reported as beneficially owned by Mr. Schlesinger are
obtainable upon exercise of options.
(2) 25,000 of the Shares reported as beneficially owned by Mr. Strong are
obtainable upon exercise of options.
(3) 7,500 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>
22
<PAGE>
<TABLE>
<S> <C>
(5) 65,000 of the Shares reported as beneficially owned by Mr. Dalton are
obtainable upon exercise of options.
(6) 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.
(7) 50,000 of the Shares reported as beneficially owned by Mr. Hennessey are
obtainable upon exercise of options.
(8) All of the Shares reported as beneficially owned by Mr. Burnes are
obtainable upon exercise of options.
(9) Includes 242,004 Shares reported as beneficially owned by Trustees and
executive officers as described in the footnotes above and 112,500 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.
23
<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 26.
2. Financial Statement Schedules.
3. Exhibits.
(a) Exhibits are as set forth in the "INDEX TO EXHIBITS" on pages 48-49.
(b) REPORTS ON FORM 8-K. On August 3, 1994, the Registrant filed a current
report on Form 8-K regarding the Trust's unaudited operating results for the
third quarter ended June 30, 1994 and the failure to make scheduled payments on
the Senior Notes. See also Item 1, "Business -- General -- Negotiations
Regarding a Restructuring."
(c) EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE. Exhibits are set
forth in the "INDEX TO EXHIBITS" on pages 48-49. 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 19027.
(d) Financial Statement Schedules, except those indicated in the "INDEX TO
FINANCIAL STATEMENTS" on page 26, have been omitted because the required
information is included in the financial statements or notes thereto, or the
amounts are not significant.
24
<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: December 29, 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
- ---------------------------------------- Chairman and Trustee December 29, 1994
Victor H. Schlesinger
President, Chief Executive
/s/ C. W. STRONG, JR. Officer and Trustee
- ---------------------------------------- (Principal Executive December 29, 1994
C. W. Strong, Jr. Officer)
Treasurer, Chief Financial
/s/ DANIEL F. HENNESSEY Officer (Principal
- ---------------------------------------- Financial and Accounting December 29, 1994
Daniel F. Hennessey Officer)
/s/ JEFFREY M. BUCHER
- ---------------------------------------- Trustee December 29, 1994
Jeffrey M. Bucher
/s/ KENT L. COLWELL
- ---------------------------------------- Trustee December 29, 1994
Kent L. Colwell
/s/ JAMES M. GASSAWAY
- ---------------------------------------- Trustee December 29, 1994
James M. Gassaway
/S/ JOHN E. KROUT
- ---------------------------------------- Trustee December 29, 1994
John E. Krout
/s/ GERHARD N. ROSTVOLD
- ---------------------------------------- Trustee December 29, 1994
Gerhard N. Rostvold
</TABLE>
25
<PAGE>
MORTGAGE AND REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. 27
Financial Statements
Statement of Operations (Years ended September 30, 1994, 1993 and 1992).................................. 28
Balance Sheet (September 30, 1994 and 1993).............................................................. 29
Statement of Cash Flows (Years ended September 30, 1994, 1993 and 1992).................................. 30
Statement of Shareholders' Equity (Years ended September 30, 1994, 1993 and 1992)........................ 31
Notes to the Financial Statements........................................................................ 32
Financial Statement Schedules
Schedule XI -- Real Estate and Accumulated Depreciation and Amortization (September 30, 1994).......... 43
Schedule XII -- Mortgage Loans on Real Estate (September 30, 1994)..................................... 46
</TABLE>
26
<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, 1994 and 1993, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1994. 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, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1994, 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 LLP
Philadelphia, Pennsylvania
November 17, 1994
27
<PAGE>
STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
Income:
Interest and fee income on mortgage loans................... $ 14,725,000 $ 19,027,000 $ 26,261,000
Income of rental properties:
Rental income............................................. 18,495,000 17,368,000 13,733,000
Operating expense reimbursement........................... 1,705,000 1,601,000 1,265,000
Interest on short-term investments.......................... 1,238,000 237,000 537,000
Other....................................................... 114,000 109,000 213,000
--------------- --------------- ---------------
36,277,000 38,342,000 42,009,000
--------------- --------------- ---------------
Expenses:
Interest.................................................... 33,002,000 28,510,000 28,956,000
Expenses of rental properties:
Depreciation and amortization............................. 5,839,000 5,500,000 4,470,000
Operating................................................. 9,827,000 10,199,000 7,808,000
Other operating expenses.................................... 4,839,000 5,258,000 5,313,000
Provision for losses on mortgage loans and related
investments................................................ 2,000,000 37,000,000 32,000,000
--------------- --------------- ---------------
55,507,000 86,467,000 78,547,000
--------------- --------------- ---------------
Loss before reorganization expenses........................... (19,230,000) (48,125,000) (36,538,000)
Reorganization expenses....................................... (2,360,000) (5,844,000) (934,000)
--------------- --------------- ---------------
Net loss...................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
Per Share:
Net loss.................................................... $(1.92) $(4.87) $(3.38)
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted average number of common shares outstanding........ 11,226,000 11,080,000 11,076,000
</TABLE>
See accompanying notes.
28
<PAGE>
BALANCE SHEET
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
<S> <C> <C>
ASSETS:
Mortgage loans and investments:
Construction loans.......................................................... $ -- $ 5,203,000
Standing loans.............................................................. 61,851,000 76,871,000
Long-term amortizing loans.................................................. 2,908,000 4,731,000
Participating loans and investments......................................... 4,563,000 12,180,000
Non-earning mortgage loans.................................................. -- 5,208,000
---------------- ----------------
69,322,000 104,193,000
Notes receivable.............................................................. 760,000 400,000
In-substance foreclosures:
Earning..................................................................... 62,097,000 69,707,000
Non-earning................................................................. 10,198,000 17,462,000
Real estate:
Investments in real estate equities......................................... 56,857,000 57,213,000
Properties acquired through foreclosure and held for sale:
Earning................................................................... 68,437,000 52,586,000
Non-earning............................................................... 32,282,000 36,134,000
Investment in partnerships.................................................. 9,524,000 9,831,000
---------------- ----------------
309,477,000 347,526,000
Less allowance for losses............................................... (13,430,000) (11,808,000)
---------------- ----------------
296,047,000 335,718,000
Cash and cash equivalents..................................................... 60,332,000 11,451,000
Interest receivable and other assets.......................................... 7,865,000 6,705,000
---------------- ----------------
$ 364,244,000 $ 353,874,000
---------------- ----------------
---------------- ----------------
LIABILITIES:
Senior Secured Notes.......................................................... $ 290,000,000 $ 290,000,000
Loan on equity investment..................................................... 17,593,000 17,572,000
Accounts payable and accrued expenses......................................... 4,050,000 4,267,000
Interest payable.............................................................. 32,568,000 412,000
---------------- ----------------
344,211,000 312,251,000
---------------- ----------------
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........................................................... (173,568,000) (151,978,000)
---------------- ----------------
Total shareholders' equity.............................................. 20,033,000 41,623,000
---------------- ----------------
$ 364,244,000 $ 353,874,000
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes.
29
<PAGE>
STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization on real estate............... 5,839,000 5,500,000 4,470,000
Provision for losses....................................... 2,000,000 37,000,000 32,000,000
Increase (decrease) in payables and accrued expenses....... (217,000) 106,000 (3,529,000)
Increase in interest payable............................... 32,156,000 412,000 --
Decrease (increase) in receivables and other assets........ (1,160,000) 2,669,000 (641,000)
Net change in interest reserves, deferred income........... (582,000) (934,000) (426,000)
Recoveries of charge offs to allowance for losses.......... 1,019,000 -- --
Other...................................................... (967,000) -- 366,000
--------------- --------------- --------------
Total adjustments............................................ 38,088,000 44,753,000 32,240,000
--------------- --------------- --------------
Net cash provided by (used in) operating activities............ 16,498,000 (9,216,000) (5,232,000)
--------------- --------------- --------------
Cash flows from investing activities:
Investments in real estate:
Properties acquired through foreclosure.................... (5,269,000) (4,600,000) (4,148,000)
In-substance foreclosures.................................. (1,337,000) (1,135,000) (2,203,000)
Real estate equities....................................... (1,847,000) (2,505,000) (3,227,000)
Advances on mortgage loans................................. -- (602,000) (2,624,000)
Partnerships............................................... -- (2,078,000) --
Principal repayments on mortgage loans....................... 25,555,000 24,604,000 50,674,000
Repayments on notes receivable............................... 168,000 -- --
Sale of foreclosed property.................................. 6,360,000 16,170,000 16,982,000
Repayment of
in-substance foreclosure.................................... 8,753,000 360,000 4,309,000
Sale of equity investment.................................... -- -- 5,194,000
--------------- --------------- --------------
Net cash provided by investing activities...................... 32,383,000 30,214,000 64,957,000
--------------- --------------- --------------
Cash flows from financing activities:
Payment of Senior Notes...................................... -- (22,000,000) (62,000,000)
--------------- --------------- --------------
Net cash used in financing activities.......................... -- (22,000,000) (62,000,000)
--------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents........... 48,881,000 (1,002,000) (2,275,000)
Cash and cash equivalents at beginning of year................. 11,451,000 12,453,000 14,728,000
--------------- --------------- --------------
Cash and cash equivalents at end of year....................... $ 60,332,000 $ 11,451,000 $ 12,453,000
--------------- --------------- --------------
--------------- --------------- --------------
Supplemental schedule of non-cash investing and financing
activities:
Transfer of real estate to mortgage loans.................... $ 750,000 $ 348,000 $ 940,000
Transfer of mortgage loans to real estate, in-substance
foreclosure and notes receivable............................ $ 10,321,000 $ 105,863,000 $ 56,554,000
Charge-offs against allowance for losses..................... $ 378,000 $ 44,545,000 $ 27,354,000
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 $ --
Transfer of in-substance foreclosures to real estate......... $ 13,109,000 $ -- $ --
</TABLE>
See accompanying notes.
30
<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,
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
Net loss.................... (21,590,000) (21,590,000)
------------- -------------- ---------------- ---------------- ----------------
Balance at September
30,1994.................... 11,226,000 $ 11,226,000 $ 182,375,000 $ (173,568,000) $ 20,033,000
------------- -------------- ---------------- ---------------- ----------------
------------- -------------- ---------------- ---------------- ----------------
</TABLE>
See accompanying notes.
31
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION
See "Item 1. Business -- General" pages 1 and 2 for information concerning
the Trust's previous chapter 11 petition on April 12, 1990 and related plan of
reorganization (1991 Plan).
See "Item 1. Business -- General -- 1992 Restructuring" for information
concerning the restructuring of the Senior Notes that resulted from the previous
chapter 11 petition.
See "Item 1. Business -- General -- Current Debt Service Requirements and
Defaults and Forecast Shortfall In Operating Cash Flow" for information
concerning the various defaults under the 1992 restructured Senior Notes.
See "Item 1. Business -- General -- 1993-1994 Negotiations With the Official
Creditors Committee" for developments regarding the proposed restructuring.
On November 17, 1994, the Trust announced that it had reached an agreement
in principle with a substantial number of holders of its Senior Notes on the
terms of a restructuring of the Senior Notes.
Pursuant to the agreement in principle, holders of the Senior Notes in the
aggregate principal amount of $290 million plus accrued interest of $41.7
million through December 31, 1994 will receive under a prepackaged plan of
reorganization under chapter 11 of the Bankruptcy Code, $110 million of new
senior secured notes due 2002, approximately $50 million in cash and 97% of the
restructured equity of the Trust (or substantially all the restructured equity
if holders of the Trust's outstanding common shares do not vote to accept the
prepackaged plan). If holders of the outstanding common shares vote to accept
the prepackaged plan, such holders will retain 3% of the equity of the
restructured Trust. The agreement in principle anticipates that the new senior
secured notes will mature in 2002 and bear interest at the rate of 11 1/8% per
annum. It is also anticipated that holders of unsecured claims will receive cash
in the allowed amount of their claims. It is contemplated that the Trust will
prepare a "shelf" registration statement for the new securities issued pursuant
to the prepackaged plan.
The agreement to pursue the restructuring proposal is subject to a number of
conditions and the Trust intends to effect the restructuring through a
prepackaged chapter 11 bankruptcy. At this time there can be no assurance that
the conditions to consummation of the proposed restructuring will be satisfied.
Other details of the agreement, including the additional conditions to
commencement and consummation of the restructuring, have not been finalized
pending the filing of proxy solicitation materials with the SEC and distribution
of a disclosure statement for the solicitation of votes for the prepackaged plan
to holders of the Trust's outstanding securities. The advisors to the Trust and
the various holders of Senior Notes are negotiating additional terms of the new
debt securities to be received by the Senior Note holders under the prepackaged
plan.
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. These financial statements also do not include any adjustments that
could be required as a result of the November 17, 1994 agreement in principle
with certain holders of Senior Notes and related proposed restructuring and
prepackaged chapter 11 bankruptcy, including adjustments required by The
American Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
for fresh start accounting.
32
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (CONTINUED)
The Trust anticipates that any adjustments that would be occasioned in the
restructuring process by its financial distress, by any inability of the Trust
to continue as a going concern or by any inability of the Trust to achieve a
consensual restructuring would be material and adverse.
The following unaudited Pro Forma Balance Sheet is presented as if (1)
Mortgage and Realty Trust had emerged from bankruptcy on September 30, 1994 with
a reorganization plan identical to the one proposed, and (2) fresh start
accounting had been adopted as of September 30, 1994. This unaudited Pro Forma
Balance Sheet should be read in conjunction with the financial statements of
Mortgage and Realty Trust and the related notes thereto included elsewhere
herein. In management's opinion, all adjustments necessary to reflect the
effects of the proposed reorganization and "fresh start accounting" have been
included. This unaudited Pro Forma Balance Sheet is not necessarily indicative
of what the actual financial position would have been at September 30, 1994, nor
does it purport to represent the future financial position of the Company.
PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------------------
HISTORICAL PROPOSED FRESH PRO FORMA
9/30/94 REORGANIZATION START 9/30/94
---------- -------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash & marketable securities.......... $ 60,332 $ (50,000)(A) $ 8,979
(1,353)(B)
Loans & owned real estate net......... 296,047 (67,047)(E) 229,000
Interest receivable................... 4,638 (2,810)(F) 1,828
Other assets.......................... 3,227 (1,955)(F) 1,272
---------- -------------- --------- ---------
Total assets...................... $ 364,244 $ (51,353) $ (71,812) $ 241,079
---------- -------------- --------- ---------
---------- -------------- --------- ---------
LIABILITIES
Senior secured notes due 1995......... $ 290,000 $(290,000)(C) $ 0
Senior secured notes due 2002......... 0 110,000(C) 110,000
Loan on REO -- Imperial Bank.......... 17,593 17,593
Interest payable...................... 32,568 (32,568)(C) 0
Accounts payable and other............ 4,050 (1,353)(B) (50)(F) 2,647
---------- -------------- --------- ---------
Total liabilities................... 344,211 (213,921) (50) 130,240
---------- -------------- --------- ---------
SHAREHOLDER'S EQUITY
Common stock at par................... 11,226 11,226
Additional paid in capital............ 182,375 162,568(D) (245,330)(G) 99,613
Retained earnings (deficit)........... (173,568) 173,568(G) 0
---------- -------------- --------- ---------
Total shareholders equity........... 20,033 162,568 (71,762) 110,839
---------- -------------- --------- ---------
Total liabilities & equity.......... $ 364,244 $ (51,353) $ (71,812) $ 241,079
---------- -------------- --------- ---------
---------- -------------- --------- ---------
</TABLE>
See Accompanying Notes
33
<PAGE>
1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (CONTINUED)
ADJUSTMENTS TO REFLECT PROPOSED REORGANIZATION
(A) Reflects the $50.0 million minimum payment to creditors being made at
implementation of the proposed plan, provided that such minimum payment may
be increased based upon the amount of cash held by the Trust in excess of
its short-term obligations following confirmation of the proposed plan.
Note: Cash and marketable securities includes $1,375 of restricted cash
related to the Trust's termination pay plan and $1,600 relating to
borrowers' deposits.
(B) Reflects cash payment to unsecured creditors totalling $1,353.
(C) Reflects the cancellation of the Senior Secured notes due 1995 in the face
amount of $290.0 and the related interest payable on these notes of $32.6
million and the recording of the new Senior Notes due 2002 in the face
amount of $110.0 million.
(D) Reflects the conversion of amounts previously owed under the Senior Secured
notes due 1995 converted to a 97% interest in the common shares of the
reorganized Trust as follows:
<TABLE>
<S> <C>
Face amount of Senior Notes due 1995................................... $ 290,000
Interest payable at 9/30/94............................................ 32,568
---------
Total amount payable to creditors at 9/30/94........................... 322,568
Less: New Senior Notes due 2002........................................ (110,000)
Less: Cash payment to creditors........................................ (50,000)
---------
Amount previously due creditors converted to equity.................... $ 162,568
---------
---------
</TABLE>
ADJUSTMENTS TO REFLECT FRESH START ACCOUNTING
(E) Reflects adjustment made to carrying value of loans and owned real estate to
adjust to estimated reorganization values.
(F) Reflects adjustment made to carrying values of accounts receivable/other
assets and accounts payable to adjust to estimated reorganization values of
$3.1 million and $4.0 million, respectively.
(G) Reflects the adjustment of the retained earnings/deficit to zero as a result
of the restructure and the adjustment of additional paid in capital as
follows:
<TABLE>
<S> <C>
Adjust deficit to reset to zero........................................ $(173,568)
Adjustment to carrying value of invested assets........................ (67,047)
Adjustment to carrying value of receivables............................ (4,765)
Adjustment to carrying value of payables............................... 50
---------
$(245,330)
---------
---------
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
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 years ended September 30, 1994, 1993 and 1992, 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.
34
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Trust incurred net operating losses of $38 million, $31 million and $12
million for tax purposes in fiscal 1993, 1992 and 1991, respectively. The Trust
estimates a net operating loss for tax purposes of approximately $35 million in
fiscal 1994. Each of these net operating losses will be available for fifteen
years as a loss carryforward to future years' taxable income. If during the
course of the proposed restructuring, Cancellation of Indebtedness taxable
income results, the net operating losses available for use in future years will
be reduced by the amount of such Cancellation of Indebtedness 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 per annum use of its net
operating losses (after the aforementioned reduction for Cancellation of
Indebtedness income) 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. Accrual of
interest income is generally terminated and foreclosure proceedings are started
if payment is more than 60 days past due.
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 American Institute of Certified Public
Accountants 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 10.5% at September 30, 1994 and
9.0% at 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,
"Basis of Financial Statement Presentation and Plan of Reorganization." Further
adjustments may also be necessary as a result of the restructuring negotiations.
The Trust anticipates that any adjustments that would be occasioned in the
restructuring process by its financial distress, by any inability of the Trust
to continue as a going concern or by any inability of the Trust to achieve a
consensual restructuring would be material and adverse.
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
Financial Accounting Standards Board 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" ("SOP 92-3").
35
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Properties acquired through foreclosure and held for sale and in-substance
foreclosures 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.
NET LOSS PER SHARE
Net loss per share for fiscal years ended 1994, 1993 and 1992 is computed
using the weighted average common shares outstanding during each period. Fully
diluted net loss per share is not disclosed because such information is not
meaningful.
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 carried at cost of $58.4 million at September 30, 1994) with
maturities ranging from 3 to 45 days.
Included in cash and cash equivalents is $1.4 million of restricted cash
which represents the funding of the employee retention plan (see Note 9) and
$1.6 million related to borrowers' deposits. See "Item 1. Business -- General --
Current Debt Service Requirements and Defaults and Forecast Shortfall In
Operating Cash Flow" for additional information regarding the establishment of
new operating accounts for the Trust, the enforcement of the Indenture Trustee's
security interest in the old deposit accounts of the Trust and the Trust's
obligation quarterly to pay the excess of available cash (as defined in the
Indenture) over $10 million to Senior Note holders.
3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE
The following table summarizes the Trust's mortgage loan portfolio:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------- -------------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF UNDERLYING SECURITY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------ ----------- ---------- ----------- ----------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Apartments.................... 1 $ 254 3 $ 5,391
Residential/Condominium*...... 9 1,334 10 1,841
Office Buildings.............. 2 1,699 1 1,135
Industrial Buildings.......... 7 30,328 10 44,086
Research & Development
Buildings.................... 3 16,371 5 25,942
Retail Buildings.............. 4 16,276 6 22,738
Hotels/Motels................. 1 3,060 1 3,060
-- --
---------- ----------
Total..................... 27 $ 69,322 36 $ 104,193
-- --
-- --
---------- ----------
---------- ----------
<FN>
- ------------------------
* Includes 80 mortgage end loans on 9 investments at September 30, 1994 and 107
mortgage end loans on 10 investments at September 30, 1993.
</TABLE>
The Trust's mortgage loan portfolio consists of loans located principally in
California, 49%, and Pennsylvania, 22%.
36
<PAGE>
3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (CONTINUED)
At September 30, 1994, the Trust had undisbursed commitments of $615,000,
all of which represents additional advances on partially funded mortgage loans.
As of September 30, 1994, there were no earning loans delinquent (more than
60 days past due) as to principal and/or interest.
At September 30, 1994 and 1993, loans totalling $24,836,000 and $33,403,000
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.
No interest rate modifications were made on mortgage loans during fiscal
1993. During fiscal 1994, two loans totalling $13,939,000 had rate reductions
due to financial difficulties of the borrower.
At September 30, 1994 and 1993, mortgage loans outstanding consisted of
fixed rate loans of $29,428,000 and $21,268,000, floating rate loans of
$35,331,000 and $70,745,000 and participating loans of $4,563,000 and
$12,180,000, respectively. Non-earning loans (including non-earning in-substance
foreclosures) and non-earning properties acquired through foreclosure and held
for sale were $42,480,000 at September 30, 1994 compared to $58,804,000 at
September 30, 1993.
The following table summarizes the Trust's investment in in-substance
foreclosures:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
----------------------- -----------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------ ----------- -------- ----------- --------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
EARNING
Office Buildings.............. 2 $12,840 2 $12,831
Industrial Buildings.......... -- -- 1 4,901
Retail Buildings.............. 3 28,452 3 28,238
Apartments.................... 1 6,695 1 6,689
Research & Development
Buildings.................... 2 14,110 3 17,048
-- --
-------- --------
Total Earning............... 8 62,097 10 69,707
-- --
-------- --------
NON-EARNING
Office Buildings.............. -- -- 1 7,433
Industrial Buildings.......... 2 10,198 3 7,576
Retail Buildings.............. -- -- 1 2,453
Apartments.................... -- -- -- --
Research & Development
Buildings.................... -- -- -- --
Hotel......................... -- -- -- --
-- --
-------- --------
Total Non-Earning........... 2 10,198 5 17,462
-- --
-------- --------
Total....................... 10 $72,295 15 $87,169
-- --
-- --
-------- --------
-------- --------
</TABLE>
The following table summarizes the Trust's investment in real estate
equities, net of accumulated depreciation of $10,023,000 at September 30, 1994
and $7,800,000 at September 30, 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
----------------------- -----------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------ ----------- -------- ----------- --------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Office Buildings.............. 4 $26,264 4 $26,504
Industrial Buildings.......... 1 6,510 1 6,626
Retail Buildings.............. 1 24,083 1 24,083
- -
-------- --------
Total..................... 6 $56,857 6 $57,213
- -
- -
-------- --------
-------- --------
</TABLE>
37
<PAGE>
3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (CONTINUED)
The following table summarizes the Trust's investment in properties acquired
through foreclosure and held for sale, net of accumulated depreciation of
$8,329,000 at September 30, 1994 and $6,143,000 at September 30, 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
----------------------- -----------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------ ----------- -------- ----------- --------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
EARNING
Apartments.................... 3 $ 21,012 4 $18,631
Office Buildings.............. 4 13,942 5 11,283
Industrial Buildings.......... 5 19,913 5 18,399
Retail Buildings.............. 1 7,585 1 1,394
Research & Development
Buildings.................... 2 5,985 1 2,879
-- --
-------- --------
Total Earning............... 15 68,437 16 52,586
-- --
-------- --------
NON-EARNING
Office Buildings.............. 5 16,449 3 7,563
Industrial Buildings.......... 4 10,794 5 15,796
Retail Buildings.............. 2 5,039 3 12,775
-- --
-------- --------
Total Non-Earning........... 11 32,282 11 36,134
-- --
-------- --------
Total..................... 26 $100,719 27 $88,720
-- --
-- --
-------- --------
-------- --------
</TABLE>
The following table summarizes the Trust's investment in partnerships, net
of accumulated depreciation of $313,628 at September 30, 1994 and $70,763 at
September 30, 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------------ ------------------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ----------------------------------------------------- ----------------- ----------- ----------------- -----------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Industrial Buildings................................. 2 $ 9,524 2 $ 9,831
- -
- -
----------- -----------
----------- -----------
</TABLE>
4. ALLOWANCE FOR LOSSES
The changes in the allowance for losses for the years ended September 30,
1994, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year...................... $11,808 $19,353 $14,707
Provisions charged to expense..................... 2,000 37,000 32,000
------- ------- -------
13,808 56,353 46,707
Less charges against allowance, net of
recoveries....................................... 378 44,545 27,354
------- ------- -------
Balance at end of year............................ $13,430 $11,808 $19,353
------- ------- -------
------- ------- -------
</TABLE>
Approximately $6,276,000, $6,394,000 and $4,488,000 of the allowance at
September 30, 1994, 1993 and 1992, respectively, are applicable to properties
acquired through foreclosure and held for sale.
38
<PAGE>
5. SENIOR NOTES
SENIOR SECURED NOTES
The lack of liquidity in many of the commercial real estate markets
continued during the fiscal year ended September 30, 1994. 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 or
the $30 million required principal payment due June 30, 1994 (taking into
account permitted deferrals). The Trust also did not make the $6.6 million, the
$6.4 million, the $7.2 million, and the $8.7 million interest payments due
December 31, 1993, March 31, 1994, June 30, 1994 and September 30, 1994,
respectively. The average borrowing rates for fiscal year ended September 30,
1994 and 1993, respectively, were 10.73% and 9.23%. At September 30, 1994, the
outstanding 12.12% interest rate on the Senior Notes was composed of interest at
11.50% on $200 million of Senior Notes (including default interest at 1%) and
13.50% 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.
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, 1994. The contractual interest rate on this loan is 9 1/4% (Prime +1 1/2%,
floor of 9%), and the loan matured in May 1994 but was extended until December
1994.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board Statement No. 107 Disclosure of
Fair Value of Financial Statements ("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 measurement of the fair value of the Senior Notes at September 30, 1994
is not practical in the context of the proposed restructuring.
The loan on equity investment is a variable rate loan that reprices
frequently, thus fair value is based on the carrying amount of the loan.
39
<PAGE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Trust's financial instruments at September
30, 1994 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
------------ ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents................................................... $ 60,332 $ 60,332
Mortgage loans and notes receivable (net of allowance for possible
losses).................................................................... 70,240 69,825
FINANCIAL LIABILITIES:
Loan on equity investment................................................... (17,593) (17,593)
Off-Balance Sheet Financial Instruments:
Unfunded loan commitments................................................. -- (615)
</TABLE>
7. SHARE OPTION PLAN
On August 14, 1994, the 1984 Share Option Plan terminated. As of September
30, 1994, 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 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, 1994,
no options were granted. Options to purchase 26,500 Common Shares at prices from
$2.50 to $14.50 terminated during the fiscal year ended September 30, 1994.
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, 1994, no options were exercised.
8. 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 and further amended the plan on July 20, 1994.
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 each of the years ended September 30, 1994 and 1993 and
$136,000 for the year ended September 30, 1992. The
40
<PAGE>
8. PENSION PLANS (CONTINUED)
actual return on plan assets was $53,327 for the year ended September 30, 1994,
$53,465 for the year ended September 30, 1993 and $72,492 for the year ended
September 30, 1992. Plan assets are currently invested in various mutual funds
and bonds. The funding status of the pension plan is:
<TABLE>
<CAPTION>
9/30/94 9/30/93
------------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................................. $ 776,000 $ 677,000
Accumulated benefit....................................................... 801,000 694,000
Projected benefit obligation.............................................. 1,008,000 993,000
Plan assets at market value............................................... 1,104,000 998,000
Key economic assumptions used in these determinations were:
Discount rate............................................................. 8.0% 8.0%
Rate of increase in compensation levels................................... 3.0% 3.0%
Expected long-term rate of return......................................... 9.0% 9.0%
</TABLE>
The Trust also maintains a 401(k) profit and sharing plan and trust.
Employer contributions are limited to 6% of participant's compensation, with a
maximum per year of $3,000 per participant. Profit sharing expense was $61,000,
$65,000 and $58,000 for years ended September 30, 1994, 1993 and 1992,
respectively.
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 $260,000 for the year ended September 30, 1994
and $60,000 for each of the years ended September 30, 1993 and 1992. The total
accumulated benefit obligation at September 30, 1994 was $450,000.
9. 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, 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 1994 and 1993, the Committee approved the payment of
discretionary bonuses totalling $123,000 and $128,500, respectively, for certain
officers of the Trust.
41
<PAGE>
9. EMPLOYEE RETENTION PLAN (CONTINUED)
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 had a three-year
vesting period from the date of grant and vested on March 29, 1994.
A termination pay plan has been established to cover termination of
employment without cause during the period that the Senior Notes, as defined,
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 $1.4
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).
10. 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.
The Trust contributed 150,000 Common Shares (1.4% of outstanding shares) as
part of the settlement of the consolidated class actions and the Class 5 claims
remaining in the chapter 11 proceeding. The settlement and contribution of
shares occurred on September 17, 1993.
11. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly results of operations for fiscal 1994 and 1993 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 1994
Total income................ $ 8,846 $ 8,420 $ 9,516 $ 9,495
Interest expense............ 7,799 7,663 8,360 9,180
Provision for losses........ -- -- -- 2,000
Reorganization expense...... 676 741 591 352
Net loss.................... (4,656) (5,152) (4,745) (7,037)
Net loss per share.......... $ (0.41) $ (0.46) $ (0.43) $ (0.62)
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)
</TABLE>
42
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1994
<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 $ 963,000 $ -- $10,686,000 $10,686,000
Anaheim, CA............. -- 2,145,000 6,810,000 1,724,000 2,145,000 8,534,000 10,679,000
Boston, MA.............. -- 500,000 2,033,000 704,000 500,000 2,737,000 3,237,000
Portland, OR............ -- 1,500,000 6,197,000 943,000 1,500,000 7,140,000 8,640,000
Industrial Center:
Whittier, CA............ -- 1,500,000 5,023,000 1,585,000 1,500,000 6,608,000 8,108,000
Retail Building:
Fremont, CA............. 17,593,000 6,528,000 15,161,000 3,841,000 6,528,000 19,002,000 25,530,000
------------ ----------- ------------ ------------- ----------- ------------ -----------------
$17,593,000 $12,173,000 $44,947,000 $ 9,760,000 $12,173,000 $54,707,000 $66,880,000(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.... $ 2,431,000 1987 40 YR.
Anaheim, CA............. 2,031,000 1988 40 YR.
Boston, MA.............. 852,000 1990 40 YR.
Portland, OR............ 1,663,000 1989 40 YR.
Industrial Center:
Whittier, CA............ 1,598,000 1987 40 YR.
Retail Building:
Fremont, CA............. 1,448,000 1992 40 YR.
------------
$10,023,000
------------
------------
</TABLE>
43
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XI (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1994
NOTES:
(a) Cost for federal income tax purposes $65,031,000.
(b) The changes in gross carrying amounts during the year ended September 30,
1994 are
summarized as follows:
<TABLE>
<S> <C> <C>
Balance at September 30, 1993.............................. $65,012,000
Additions during year:
Improvements............................................. $ 1,847,000
Loan advance by construction lender...................... 21,000 1,868,000
----------- -----------
Balance at September 30, 1994............................ $66,880,000
-----------
-----------
The changes in gross carrying amounts during the year ended September 30, 1993 are
summarized as follows:
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 change in accumulated depreciation and amortization during the year ended September
30, 1994 is summarized as follows:
Balance at September 30, 1993.............................. $ 7,799,000
Additions during year:
Charge to income......................................... 2,224,000
-----------
Balance at September 30, 1994.............................. $10,023,000
-----------
-----------
</TABLE>
44
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XI (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1994
<TABLE>
<S> <C> <C>
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
-----------
-----------
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, 1991.............................. $ 3,132,000
-----------
-----------
</TABLE>
45
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF LOANS SUBJECT
TO DELINQUENT
NUMBER OF INTEREST CARRYING AMOUNT PRINCIPAL OR
TYPE OF LOANS LOANS RATE FINAL MATURITY DATE OF MORTGAGES INTEREST
- --------------------------------- ------------- ------------- ------------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Standing Loans:
Industrial buildings:
Tucson, AZ................... 1 8.00% March 1999 $ 4,384,000 $ --
Uwchlan Twp., PA............. 1 9.75% December 1994 16,608,000 --
Carson, CA................... 1 9.50% February 1995 4,029,000 --
Others....................... 2 9.00%-10.00% February 1995-July 1997 2,536,000 --
Retail buildings:
Citrus Heights, CA........... 1 9.25% February 1996 3,957,000 --
El Toro, CA.................. 1 9.25% January 1995 8,864,000 --
Philadelphia, PA............. 1 10.75% December 1994 3,250,000 --
Research & development
buildings:
Santa Anne, CA............... 1 8.00% December 1999 11,929,000 --
San Dumas, CA................ 1 10.75% March 1995 2,484,000 --
Office buildings............... 1 7.25% June 1999 750,000 --
Hotel:
Sparks, NV................... 1 10.00% October 1996 3,060,000 --
----------------
61,851,000 --
----------------
Long-Term Amortizing Loans:
Office buildings............... 1 9.75% April 1999 949,000 --
Apartments..................... 1 9.00% July 2000 254,000 --
Residential/Condominiums (a)... 80 6.20%-9.50% July 1995-June 2009 1,334,000 --
Retail building................ 1 8.875% November 1999 205,000 --
Industrial buildings........... 1 9.00% April 1999 166,000 --
---------------- -----
2,908,000 --
---------------- -----
Participating Loans and
Investments:
Industrial buildings:
Worcester, MA................ 1 11.00% May 2002 2,605,000 --
Research & development
buildings:
Bristol, PA.................. 1 9.00% November 1995 1,958,000 --
---------------- -----
4,563,000 --
---------------- -----
Total Mortgage Loans and
Investments..................... $ 69,322,000(b)(c) $ --
---------------- -----
---------------- -----
</TABLE>
46
<PAGE>
MORTGAGE AND REALTY TRUST
SCHEDULE XII (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 1994
NOTES:
(a) Consists of 80 mortgage end loans on 9 projects.
(b) The aggregate cost for federal income tax purposes is $69,480,000.
(c) The change in carrying value of mortgage loans during the year ended
September 30, 1994
were as follows:
<TABLE>
<S> <C>
Balance at September 30, 1993.......................................... $ 104,193,000
Advances on mortgage loans............................................. --
Transfer of real estate to mortgage loans.............................. 750,000
Net change in interest reserves, deferred income....................... 480,000
-------------
105,423,000
Collections of principal............................................... 25,555,000
Transfer to real estate................................................ 10,321,000
Chargeoff against allowance for losses................................. 225,000
-------------
$ 69,322,000
-------------
-------------
The change in carrying value of mortgage loans during the year ended September 30, 1993
were as follows:
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
-------------
-------------
</TABLE>
47
<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).
10.8* Resolutions of Amendment to Amended and Restated Employees'
Retirement Plan.
11* Schedule of Net Income Per Share -- Assuming Full Dilution for the
years ended September 30, 1994, 1993 and 1992
20.1 Press Release (12) (Exhibit 20.1).
20.2 Term Sheet (12) (Exhibit 20.2).
21* Subsidiaries.
23* Consent of Ernst & Young LLP dated December 27, 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.
</TABLE>
48
<PAGE>
<TABLE>
<S> <C>
(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.
(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.
(12) Filed on November 28, 1994 as an exhibit to the Current Report on Form 8-K
(No. 1-6613) and incorporated herein by reference.
* Exhibit filed with this Form 10-K.
</TABLE>
49
<PAGE>
EXHIBIT 10.8
SECRETARY'S CERTIFICATION
The undersigned Secretary of Mortgage and Realty Trust (the "Trust"), a real
estate investment trust duly organized under the laws of the State of Maryland,
hereby certifies that the following is a true and correct copy of the preambles
and resolutions duly adopted by the Board of Trustees of the Trust on July 20,
1994, and that such resolutions have not been modified or rescinded and are
still in full force and effect as of the date hereof:
WHEREAS, the Trust has heretofore adopted and maintained, and continues to
maintain, a certain Plan and Trust qualified under Sections 401(a) and 501(a) of
the Internal Revenue Code known as the "Employees' Retirement Plan for Mortgage
and Realty Trust" (the "Plan"); and
WHEREAS, in the opinion of the Board of Trustees, it is in the best interest
of the Trust to amend the Plan so as to permit distributions following
termination of employment and to permit distribution of an employee's vested
benefit in lump sum form;
NOW THEREFORE, BE IT
RESOLVED, that Item E16 of the Adoption Agreement to the Employees'
Retirement Plan for Mortgage and Realty Trust dated December 16,
1992 is hereby amended by eliminating E16 c. thereof and selecting
instead E16 d. reading "Distributions may be made at the
Participant's election as soon as practicable after the
Anniversary Date following termination of employment"; and it is
further
RESOLVED, that Item E17 of the aforesaid Adoption Agreement is hereby
amended by eliminating E17 a. thereof and selecting instead E17 c.
reading "Distributions under the Plan may be made in annuities and
. . . IN LUMP SUMS OR INSTALLMENTS"; and it is further
RESOLVED, that the aforesaid amendments shall be effective as of January 1,
1994; and it is further
RESOLVED, that the appropriate officers of the Trust are hereby authorized
and directed to take any and all actions, to sign such documents
and to make such filings with any State or Federal agency as may
be necessary to effectuate the foregoing resolutions.
/s/ CLAIRE M. ADAMS
--------------------------------------
Claire M. Adams, Secretary
DATED: July 20, 1994
[SEAL]
<PAGE>
EXHIBIT 11
MORTGAGE AND REALTY TRUST
SCHEDULE OF NET INCOME PER SHARE -- ASSUMING FULL DILUTION
FOR THE YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
BASIS:
Net loss...................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000)
Average common shares outstanding............................. 11,226,000 11,080,000 11,076,000
20% limitation on assumed repurchase.......................... 2,245,000 2,216,000 2,215,000
Market price at the end of the period......................... $.375 $.375 $1.125
Options outstanding........................................... 426,000 452,500 584,500
COMPUTATION:
Proceeds:
Options..................................................... 426,000 452,500 584,500
Average exercise price...................................... X $5.37 X $5.36 X $8.15
--------------- --------------- ---------------
$ 2,288,000 $ 2,425,000 $ 4,764,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Adjustment of proceeds:
Purchase of outstanding common shares at market............. $ 842,000 $ 831,000 $ 2,492,000
Retirement of debt.......................................... 1,446,000 1,594,000 2,272,000
--------------- --------------- ---------------
$ 2,288,000 $ 2,425,000 $ 4,764,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Adjustment of net loss:
Net loss before gain on sales of real estate................ $ (21,590,000) $ (53,969,000) $ (37,472,000)
Interest reduction.......................................... 155,000 135,000 176,000
--------------- --------------- ---------------
Adjusted net loss......................................... $ (21,435,000) $ (53,834,000) $ (37,296,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
Adjustment of shares outstanding:
Average shares outstanding.................................. 11,226,000 11,080,000 11,076,000
Net shares repurchased...................................... (1,819,000) (1,764,000) (1,631,000)
--------------- --------------- ---------------
Adjusted shares outstanding (basis for computation of net
income per share -- assuming full dilution).............. 9,407,000 9,316,000 9,445,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Fully diluted earnings per share:
Net loss.................................................... $(2.28) $(5.78) $(3.95)
--------------- --------------- ---------------
--------------- --------------- ---------------
<FN>
- ------------------------
NOTE -- Primary earnings per share is based on the average number of shares
outstanding.
</TABLE>
<PAGE>
EXHIBIT 21
MORTGAGE AND REALTY TRUST
SUBSIDIARIES AS OF SEPTEMBER 30, 1994
<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)
150 Rittenhouse Circle, Inc. (corporation) 100% Maryland
MRT Santa Monica, Inc. (corporation) 100% California
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated November 17, 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, 1994.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
December 27, 1994
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-START> OCT-01-1993
<PERIOD-END> SEP-30-1994
<CASH> 60,332
<SECURITIES> 0
<RECEIVABLES> 7,865
<ALLOWANCES> (13,430)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 364,244
<CURRENT-LIABILITIES> 0
<BONDS> 307,593
<COMMON> 11,226
0
0
<OTHER-SE> 8,807
<TOTAL-LIABILITY-AND-EQUITY> 364,244
<SALES> 0
<TOTAL-REVENUES> 36,277
<CGS> 0
<TOTAL-COSTS> 20,505
<OTHER-EXPENSES> 2,360
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> 33,002
<INCOME-PRETAX> (21,590)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,590)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> (1.92)
</TABLE>
