MORTGAGE & REALTY TRUST
PRER14A, 1995-06-09
REAL ESTATE INVESTMENT TRUSTS
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<PAGE>
 
                                  SCHEDULE 14A
                                 (RULE 14a-101)
 
                    INFORMATION REQUIRED IN PROXY STATEMENT
 
                            SCHEDULE 14A INFORMATION
 
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
                               (AMENDMENT NO. 1)
 
Filed by the Registrant [X]
 
Filed by a Party other than the Registrant [_]
 
Check the appropriate box:
 
[X] Preliminary Proxy Statement           [_] CONFIDENTIAL, FOR USE OF THE
                                              COMMISSION ONLY (AS PERMITTED BY
                                              RULE 14A-6(E)(2))
 
[_] Definitive Proxy Statement
 
[_] Definitive Additional Materials
 
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
                            
                         MORTGAGE AND REALTY TRUST     
                (Name of Registrant as Specified in Its Charter)
                            
                         MORTGAGE AND REALTY TRUST     
                   (Name of Person(s) Filing Proxy Statement)
 
Payment of Filing Fee (check the appropriate box):
   
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
       
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
    6(i)(3).
 
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
 
  (1) Title of each class of securities to which transaction applies:
 
  (2) Aggregate number of securities to which transaction applies:
 
  (3) Per unit price or other underlying value of transaction computed
      pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
      filing fee is calculated and state how it was determined):
 
  (4) Proposed maximum aggregate value of transaction:
   
[X] Fee paid previously with preliminary materials.     
 
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
    0-11(a)(2) and identify the filing for which the offsetting fee was paid
    previously. Identify the previous filing by registration statement number,
    or the Form or Schedule and the date of its filing.
 
  (1) Amount previously paid:
 
  (2) Form, Schedule or Registration Statement No.:
 
  (3) Filing Party:
 
  (4) Date Filed:
<PAGE>
 
       
                           DISCLOSURE STATEMENT AND
                      
                   PROXY STATEMENT FOR THE SOLICITATION     
            OF VOTES FOR THE PREPACKAGED PLAN OF REORGANIZATION OF
 
                           MORTGAGE AND REALTY TRUST
   
  Mortgage and Realty Trust, a Maryland real estate investment trust (the
"Company"), upon the terms and subject to the conditions set forth in this
Disclosure Statement and Proxy Statement for the Solicitation of Votes for the
Prepackaged Plan of Reorganization of Mortgage and Realty Trust (this
"Disclosure Statement") and the accompanying forms of Ballot (the "Ballot")
and/or Master Ballot (the "Master Ballot"), hereby solicits (the "Plan
Solicitation" or "Solicitation") from each holder of Outstanding Notes,
Outstanding Common Shares, Other Secured Claims and Unsecured Claims (as each
such term is hereinafter defined) (collectively, the "Holders") as of the
close of business on July 7, 1995 (the "Record Date"), acceptance of a
prepackaged plan of reorganization (the "Prepackaged Plan") under chapter 11
of title 11 of the United States Code, as amended (the "Bankruptcy Code").
       
  Consummation of the Prepackaged Plan will result in the restructuring
described in this Disclosure Statement (the "Restructuring"). The Prepackaged
Plan provides, among other things, that holders of the Company's debt
securities as of the date the Prepackaged Plan becomes effective (the
"Effective Date") shall receive the following securities, after giving effect
to a one for 33.33 reverse stock split (the "Reverse Stock Split") of the
Company's Common Shares, par value $1.00 per share (the "Common Shares"):     
 
<TABLE>   
<CAPTION>
 FOR EACH $1,000 PRINCIPAL AMOUNT OF: THE HOLDER WILL RECEIVE:
 ------------------------------------ ------------------------
 <C>                                  <S>
 Senior Secured Uncertificated Notes  (a) $379.31 in principal amount of new
 due 1995 (the "Outstanding Notes")   11-1/8% Senior Secured Notes due 2002
                                      (the "New Senior Notes") (an aggregate of
                                      $110,000,000 principal amount), (b) a pro
                                      rata portion of an aggregate of at least
                                      $50,000,000 less any amounts paid between
                                      March 1, 1995 and the date on which the
                                      Company files its voluntary petition for
                                      relief commencing the Bankruptcy Case (as
                                      hereinafter defined) (the "Petition
                                      Date") pursuant to the Agreement of
                                      Understanding (as hereinafter defined)
                                      (plus such additional amount, if any,
                                      based upon cash available in excess of
                                      the Initial Cash Reserve Fund (as
                                      hereinafter defined)) and (c) 37.55
                                      Common Shares (the "New Common Shares").
                                      The due, punctual and full payment of the
                                      principal of and interest on the New
                                      Senior Notes will be jointly, severally
                                      and unconditionally guaranteed by the
                                      Subsidiaries (as defined under the New
                                      Senior Note Indenture) of the Company.
</TABLE>    
   
  Under the Prepackaged Plan, holders of the Company's currently outstanding
Common Shares (the "Outstanding Common Shares") will retain their existing
Common Shares, subject to the Reverse Stock Split and the issuance of the New
Common Shares to holders of Outstanding Notes as described above. However, the
total equity ownership in the Company of existing holders of Outstanding
Common Shares will be reduced from 100% to 3% under the Prepackaged Plan. IF
THE CLASS OF HOLDERS OF OUTSTANDING COMMON SHARES DOES NOT VOTE TO ACCEPT THE
PREPACKAGED PLAN, THE PREPACKAGED PLAN PROVIDES FOR A "CRAMDOWN" UNDER WHICH
ALL OUTSTANDING COMMON SHARES WILL BE CANCELLED AND HOLDERS OF OUTSTANDING
COMMON SHARES WILL NOT RECEIVE OR RETAIN ANYTHING. If the "cramdown" is
effected, the New Common Shares distributed to holders of Outstanding Notes
will represent 99.5% of the Company's outstanding equity securities after the
Restructuring and the remaining 0.5% will be distributed to charities
designated by the Principal Holders (as hereinafter defined).     
     
  THE PLAN SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
                   , 1995, UNLESS EXTENDED (THE "EXPIRATION DATE").     
 
                               ---------------
    
 This Disclosure Statement is first being mailed to Record Holders on       ,
                                  1995.     
                                
                             (cover page continued on the following pages)     
<PAGE>
 
   
  (cover page continued)     
   
  The Prepackaged Plan also provides that (a) holders of Other Secured Claims
(as defined below) will (at the option of the Company and with the consent of
the Principal Holders (as hereinafter defined)) (i) be paid in full, in cash,
on the Effective Date (or as soon as practicable after the date on which any
such claim is allowed if the date of allowance is later than the Effective
Date), (ii) be paid upon such other less favorable terms as may be mutually
agreed upon by the Company and the holder of such claim, or (iii) be
reinstated and paid or performed by the Company in accordance with section
1124 of the Bankruptcy Code, or the legal, equitable and contractual rights to
which such claim entitles the holder of such claim shall be left unaltered,
and (b) holders of Unsecured Claims (as defined below) will receive cash equal
to the amount of such claim unless the holder of such claim agrees to a less
favorable treatment, as described in this Disclosure Statement. "Other Secured
Claims" means any Claim (as hereinafter defined) against the Company, other
than a Claim of a holder of Outstanding Notes, or a Class 2 Expense Claim (as
hereinafter defined), of a creditor secured by a lien on property of the
Company, to the extent of the value, as determined by the Bankruptcy Court (as
hereinafter defined) pursuant to section 506(a) of the Bankruptcy Code of such
creditor's interest in such property of the Company. "Unsecured Claim" means
any Claim against the Company, that is not an Administrative Claim (as
hereinafter defined), a Priority Claim (as hereinafter defined), a Claim under
or evidenced by the Outstanding Notes, the Outstanding Note Indenture (as
hereinafter defined), the Outstanding Collateral Agreement (as hereinafter
defined) or the Prior Plan (as hereinafter defined), any Other Secured Claim,
or a Claim based upon the Outstanding Common Shares or Outstanding Stock
Rights (as hereinafter defined).     
   
  The Outstanding Notes and the Outstanding Common Shares are referred to
herein collectively as the "Outstanding Securities." The New Senior Notes and
the New Common Shares are referred to herein collectively as the "New
Securities."     
   
  It is important that Holders read and carefully consider the matters
described in this Disclosure Statement and respond promptly to the Plan
Solicitation. Currently, the Company's capital structure is highly leveraged,
and the Company is unable to meet its substantial debt service requirements.
The Company is undertaking the Restructuring in order to adjust its capital
structure to reflect its present projected prospects. By March 31, 1995, the
Company had defaulted in the payment of $152.6 million in principal and $51.3
million of interest due in respect of the Outstanding Notes. As a result of
the Company's financial condition and the current condition of the United
States real estate markets, the Company will be unable to meet its debt
service requirements and make scheduled payments in the absence of the
Restructuring. Consequently, there can be no assurance that the Outstanding
Note Trustee and the Outstanding Collateral Agent (as each such term is
hereinafter defined) will not take remedial or enforcement action with respect
to the Company's bank accounts or other properties, including acceleration of
the Outstanding Notes and foreclosure. See "The Prepackaged Plan--Background
of the Restructuring." Therefore, with or without the requisite acceptances of
the Prepackaged Plan, it will be necessary for the Company to file for
protection under chapter 11 of the Bankruptcy Code ("Chapter 11").     
   
  According to special purpose valuation reports prepared by Kenneth Leventhal
& Company ("Kenneth Leventhal"), as of March 31, 1995, the range of enterprise
going concern value is $265 million to $285 million and the range of
liquidation value is $220 million to $260 million. As of May 31, 1995, the
Company had $290 million in Outstanding Notes plus accrued interest of $32.9
million net of the April 11, 1995 payment of $25.0 million. Consequently, if
the Prepackaged Plan is not consummated, holders of claims against the
Company, whether or not asserted or allowed, as defined in section 101(5) of
the Bankruptcy Code ("Claims") may not receive cash or securities of the same
value and having as favorable terms as under the Prepackaged Plan and holders
of Outstanding Common Shares may not receive or retain anything in the event
of a foreclosure, nonconsensual bankruptcy or liquidation. THE COMPANY
RECOMMENDS THAT ALL HOLDERS VOTE IN FAVOR OF THE PREPACKAGED PLAN. For a
discussion of certain important factors that should be considered in
connection with the Restructuring, see "Special Factors and Certain
Considerations."     
 
  For the Prepackaged Plan to be confirmed (without the use of "cramdown"
procedures as to classes of Holders entitled to vote on the Prepackaged Plan),
the Company must receive acceptances ("Plan Acceptances") from the Holders of
(i) Claims constituting at least two-thirds in dollar amount and more than
one-half in number of the allowed Claims in each impaired class of Claims that
have actually voted on the Prepackaged Plan, and (ii) equity
 
                                      ii
<PAGE>
 
   
(cover page continued)     
   
interests constituting at least two-thirds in amount of the allowed equity
interests in each impaired class of equity interests that have actually voted
on the Prepackaged Plan (the "Requisite Plan Acceptances"). ONLY VOTES ACTUALLY
CAST WILL BE COUNTED IN DETERMINING WHETHER THE REQUISITE PLAN ACCEPTANCES FROM
EACH VOTING CLASS HAVE BEEN OBTAINED. IF THE COMPANY RECEIVES THE REQUISITE
PLAN ACCEPTANCES FROM THE HOLDERS OF OUTSTANDING NOTES BUT HOLDERS OF
OUTSTANDING COMMON SHARES OR OTHER IMPAIRED CLAIMS REJECT THE PREPACKAGED PLAN,
THE COMPANY WILL SEEK CONFIRMATION OF THE PREPACKAGED PLAN PURSUANT TO SECTION
1129(b) OF THE BANKRUPTCY CODE, PURSUANT TO "CRAMDOWN" PROCEDURES. IF THE
COMPANY DOES NOT RECEIVE THE REQUISITE PLAN ACCEPTANCES FROM THE CLASS OF
HOLDERS OF OUTSTANDING COMMON SHARES, THE PREPACKAGED PLAN PROVIDES THAT ALL
OUTSTANDING COMMON SHARES WILL BE CANCELLED AND HOLDERS OF OUTSTANDING COMMON
SHARES WILL NOT RECEIVE OR RETAIN ANYTHING. If the Company must invoke
"cramdown" procedures, the Company may propose alternatives to the terms
proposed in the Prepackaged Plan. For a discussion of "cramdown" procedures and
the effects thereof, see "The Prepackaged Plan--Confirmation of the Prepackaged
Plan--Nonconsensual Confirmation." Unless otherwise stated or otherwise
indicated by context, the discussion contained in this Disclosure Statement
assumes that the Prepackaged Plan will be confirmed with the approval of the
holders of Outstanding Common Shares and that, consequently, holders of
Outstanding Common Shares will retain their interests as provided in the
Prepackaged Plan.     
   
  If the Requisite Plan Acceptances are received from the holders of
Outstanding Notes, the Company will commence a case (the "Reorganization Case"
or "Bankruptcy Case") under Chapter 11 and use the Plan Acceptances received to
obtain confirmation of the Prepackaged Plan. On the Effective Date, the
Outstanding Notes will be exchanged for the consideration set forth above, and
the Amended and Restated Declaration of Trust of the Company (the "Amended and
Restated Declaration of Trust"), including the Reverse Stock Split, will be
effected, each on the terms set forth in the Prepackaged Plan. After giving
effect to the Reverse Stock Split and the distributions of New Common Shares
under the Prepackaged Plan, there would be approximately 11,227,000 Common
Shares outstanding, of which the Outstanding Common Shares held by existing
shareholders would represent approximately 3% of the total number of
outstanding Common Shares.     
   
  The Prepackaged Plan also includes provisions relating to (i) the initial
composition of the board of trustees of the Company (the "Board of Trustees"),
(ii) certain registration rights granted in favor of certain holders of New
Senior Notes and New Common Shares and (iii) release of certain claims by the
Company and Holders. See "The Prepackaged Plan."     
   
  The Company will not hold a meeting to vote on the Prepackaged Plan. Rather,
the Company is soliciting acceptances of the Prepackaged Plan by means of
Ballots and Master Ballots. Any Holder who wishes to vote with respect to the
Prepackaged Plan should complete, sign and return the applicable Ballot or
Master Ballot in accordance with the instructions set forth in this Disclosure
Statement.     
 
  IF THE PREPACKAGED PLAN IS CONFIRMED BY THE BANKRUPTCY COURT (AS HEREINAFTER
DEFINED), ALL HOLDERS (INCLUDING THOSE WHO ABSTAIN OR VOTE TO REJECT THE
PREPACKAGED PLAN) OF CLAIMS AGAINST AND EQUITY INTERESTS IN THE COMPANY WILL BE
BOUND BY THE PREPACKAGED PLAN AND THE TRANSACTIONS CONTEMPLATED THEREBY.
   
  The Company reserves the right to amend, modify or supplement the Prepackaged
Plan, subject to the conditions in the Prepackaged Plan, prior to its
effectiveness. The Company also reserves the right to cancel the Solicitation
at any time prior to the Expiration Date and revoke the Prepackaged Plan,
subject to the conditions contained in the Prepackaged Plan. The Company will
give the Record Holders (as hereinafter defined) notice of any amendments,
modifications or supplements as may be required by applicable law. See "The
Plan Solicitation; Voting Procedures--Expiration Date; Extension; Amendments"
and "The Prepackaged Plan--Modification of the Prepackaged Plan."     
 
  No appraisal rights are available to holders of Outstanding Common Shares in
connection with the Prepackaged Plan.
 
 
                                      iii
<PAGE>
 
          
(cover page continued)     
 
                               ----------------
   
  ALL HOLDERS SHOULD READ AND CAREFULLY CONSIDER THIS DISCLOSURE STATEMENT
PRIOR TO RESPONDING TO THE PLAN SOLICITATION AND THE OTHER MATTERS ADDRESSED
HEREIN, INCLUDING, WITHOUT LIMITATION, ALL OF THE FACTORS SET FORTH UNDER THE
HEADING "SPECIAL FACTORS AND CERTAIN CONSIDERATIONS." Holders should not
construe the contents of this Disclosure Statement as providing any legal,
business, financial or tax advice. Each Holder should, therefore, consult with
its own legal, business, financial and tax advisors on any matters concerning
the contents of this Disclosure Statement and the transactions contemplated
hereby.     
   
  THE BOARD OF TRUSTEES HAS VOTED UNANIMOUSLY TO APPROVE THE RESTRUCTURING, HAS
DETERMINED THAT THE RESTRUCTURING IS FAIR TO THE UNAFFILIATED HOLDERS OF THE
COMPANY'S OUTSTANDING SECURITIES AND OTHER CLAIMS AND INTERESTS, AND RECOMMENDS
THAT ALL HOLDERS, INCLUDING HOLDERS OF OUTSTANDING COMMON SHARES, VOTE IN FAVOR
OF THE PREPACKAGED PLAN.     
 
                               ----------------
   
  The Outstanding Common Shares are listed for trading on the New York Stock
Exchange (the "NYSE") and the Pacific Stock Exchange (the "PSE") under the
symbol "MRT." On June 2, 1995, the last reported sale price of the Outstanding
Common Shares on the NYSE was $.25 per share. See "Market and Trading
Information."     
 
  The Outstanding Notes are not listed on any national or regional exchange.
The Outstanding Notes trade on a limited basis in the over-the-counter market.
Prior to the Plan Solicitation, there has been no established trading market
for the New Senior Notes. The Company does not contemplate that the New Senior
Notes will be listed on a national or regional securities exchange, and there
can be no assurance that the New Senior Notes will be eligible for listing or
listed on any national or regional exchange in the future. Consequently, there
can be no assurance concerning the prices at which the New Senior Notes will
trade or whether a market will exist for the trading thereof.
   
  To the extent that the Solicitation is deemed to result in offers of new
securities that are not exempted by section 1145(a) of the Bankruptcy Code,
they are being made by the Company in reliance on the exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), afforded by Section 4(2) or Section 3(a)(9) thereof. The
Company will not pay any commission or other remuneration to any broker,
dealer, salesman or other person for soliciting acceptances of the Prepackaged
Plan. Regular employees of the Company, who will not receive additional
compensation therefor, may solicit acceptances. The Company has made no
arrangements for and has no understandings with any broker, dealer, salesman or
other person regarding the Plan Solicitation.     
 
                               ----------------
   
  NEITHER THE NEW SECURITIES OFFERED HEREBY NOR THE PREPACKAGED PLAN HAS BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
DISCLOSURE STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BECAUSE NO BANKRUPTCY CASE HAS YET BEEN FILED, THIS DISCLOSURE STATEMENT HAS
NOT BEEN APPROVED BY ANY BANKRUPTCY COURT WITH RESPECT TO THE ADEQUACY OF
INFORMATION OR ANY OTHER MATTER. HOWEVER, IF A CASE IS SUBSEQUENTLY COMMENCED,
THE COMPANY WILL SEEK BANKRUPTCY COURT APPROVAL OF THIS DISCLOSURE STATEMENT AS
PART OF THE ORDER CONFIRMING THE PREPACKAGED PLAN.     
 
                                       iv
<PAGE>
 
   
(cover page continued)     
 
                    SOLICITATION AGENT AND INFORMATION AGENT
   
  The Company, or its designee, will act as solicitation agent for the
Solicitation (the "Solicitation Agent"). All correspondence in connection with
the Plan Solicitation, the Ballots and the Master Ballots should be addressed
to the Company at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania
19027-1590, attention: Daniel F. Hennessey (telephone: (215) 881-1525).     
   
  The Company, or its designee, will act as information agent in connection
with the Solicitation (the "Information Agent"). Questions and requests for
assistance may be directed to the Company at 8380 Old York Road, Suite 300,
Elkins Park, Pennsylvania 19027-1590, attention: Daniel F. Hennessey
(telephone: (215) 881-1525).     
 
                             AVAILABLE INFORMATION
          
  The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). In addition,
the Company has filed with the Commission an application on Form T-3 for
qualification under the Trust Indenture Act of 1939, as amended, of the
indenture governing the New Senior Notes. Such application contains certain
information and exhibits not contained in the Disclosure Statement. Such
application, reports, proxy statements and other information can be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located in the New York Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048 and the
Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549. In
addition, such reports, proxy statements and other information can be inspected
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005, or at the offices of the Pacific Stock Exchange, 233 South Beaudry
Avenue, Los Angeles, California 90017, on which the Company's Common Shares are
listed.     
   
  The Company has not included all of the exhibits to the Prepackaged Plan in
this Disclosure Statement. Such exhibits may be inspected at the offices of the
Company. If you desire to review or obtain a copy of any exhibit to the
Prepackaged Plan not included in the Disclosure Statement, you should contact
Daniel F. Hennessey, Treasurer of the Company, 8380 Old York Road, Suite 300,
Elkins Park, Pennsylvania 19027-1590. The Company's telephone number is (215)
881-1525.     
   
  No person has been authorized to give any information or to make any
representation not contained in this Disclosure Statement in connection with
the Plan Solicitation and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company or any other
person. The Plan Solicitation is not being made to, nor will the Company accept
votes or tenders from, Holders in any jurisdiction in which the Solicitation
would not be in compliance with the securities or blue sky laws of such
jurisdiction. This Disclosure Statement does not constitute an offer to sell or
a solicitation of any offer to purchase any securities to any person in any
jurisdiction in which such offer or solicitation is unlawful. Neither the
delivery of this Disclosure Statement nor any exchange made hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of the Company and its subsidiaries since the respective dates
as of which information is given herein.     
 
                                       v
<PAGE>
 
       
                               TABLE OF CONTENTS
 
<TABLE>   
<S>                                                                          <C>
SUMMARY.....................................................................   1
 The Company................................................................   1
 Background of the Restructuring............................................   1
 Purposes of the Restructuring..............................................   5
 Effects of the Prepackaged Plan............................................   6
 Recommendation of the Board of Trustees....................................   8
 Special Purpose Valuation Reports of Kenneth Leventhal ....................  10
 The Plan Solicitation......................................................  11
 Special Factors and Certain Considerations.................................  13
 Summary Projected Financial Information....................................  15
 Summary Pro Forma Financial Information....................................  17
 Summary Historical Financial Information...................................  18
 Certain Federal Income Tax Consequences....................................  19
SPECIAL FACTORS AND CERTAIN CONSIDERATIONS..................................  20
 Financial Condition of the Company;
  Liquidity.................................................................  20
 Continuing Leverage........................................................  20
 Foreclosure and Bankruptcy Alternatives....................................  20
 Possible Further Decline of Real Estate Markets............................  21
 Disruption of the Company's Business.......................................  22
 Considerations Relating to the Prepackaged Plan............................  22
 Certain Bankruptcy Considerations if the Prepackaged Plan is Not Confirmed
   and the Restructuring is Not Otherwise Consummated.......................  23
 Certain Consequences to Non-Voting Holders of Common Shares................  24
 Material Dilution of Common Equity.........................................  24
 Risks Relating to the Projections..........................................  24
 Restricted Payments........................................................  24
 Absence of Public Market...................................................  25
 Releases...................................................................  25
 Federal Income Tax Considerations..........................................  26
THE PREPACKAGED PLAN........................................................  27
 Background of the Restructuring............................................  27
 Recommendation of the Board of Trustees....................................  38
 Special Purpose Valuation Reports of Kenneth Leventhal.....................  39
 Reports of Houlihan Lokey as Financial Advisor to the Company..............  41
 Brief Explanation of Chapter 11 Reorganization.............................  44
 Classification and Treatment of Claims and
   Interests................................................................  45
 Summary of Other Provisions of the
   Prepackaged Plan.........................................................  49
 Means For Implementation of the
   Prepackaged Plan.........................................................  52
 Modification of the Prepackaged Plan.......................................  56
 Revocation of the Prepackaged Plan.........................................  56
 Confirmation of the Prepackaged Plan.......................................  56
 Effects of Prepackaged Plan Confirmation...................................  63
 Alternatives to Confirmation and Consummation of the Prepackaged Plan......  64
 Insider and Affiliate Claims...............................................  65
 Applicability of Federal And Other
   Securities Laws To Resales of New
   Common Shares and New Senior Notes.......................................  65
THE PLAN SOLICITATION; VOTING PROCEDURES....................................  67
 General....................................................................  67
 Voting Record Date.........................................................  68
 Required Votes.............................................................  68
 How to Vote................................................................  69
 Agreements Upon Furnishing Ballots Accepting the Restructuring.............  70
 Waivers of Defects, Irregularities, Etc....................................  70
 Expiration Date; Extension; Amendments.....................................  71
 Revocation Rights..........................................................  71
 Solicitation Agent.........................................................  72
 Information Agent..........................................................  72
 Other Matters..............................................................  72
FINANCIAL PROJECTIONS.......................................................  73
ACCOUNTING TREATMENT........................................................  79
PRO FORMA FINANCIAL INFORMATION.............................................  79
SELECTED FINANCIAL DATA.....................................................  86
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
 OPERATIONS.................................................................  87
 Liquidity and Capital Resources............................................  87
 Results of Operations......................................................  88
BUSINESS....................................................................  92
 General....................................................................  92
 Investments................................................................  93
 Allowance for Losses.......................................................  96
 Properties.................................................................  97
 Legal Proceedings..........................................................  97
MANAGEMENT..................................................................  98
 Executive Compensation.....................................................  99
 Executive Compensation Tables..............................................  99
 Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Values.... 100
</TABLE>    
 
                                       vi
<PAGE>
 
       
<TABLE>   
<S>                                                                          <C>
 Pension Plans.............................................................. 100
 Trustee Compensation....................................................... 101
 Savings Incentive Plan..................................................... 101
 Employee Retention Plan.................................................... 102
 Compensation Committee Interlocks and Insider Participation................ 103
 Termination of Employment and Change-In-Control Arrangements............... 103
 Indemnification............................................................ 103
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 104
 Current Holders............................................................ 104
 Certain Holders After Restructuring........................................ 105
MARKET AND TRADING INFORMATION.............................................. 106
 Common Shares.............................................................. 106
 Outstanding Notes.......................................................... 107
DESCRIPTION OF NEW SENIOR NOTES............................................. 108
 General.................................................................... 108
 Optional Redemption........................................................ 108
 Mandatory Redemption....................................................... 108
 Notice and Selection....................................................... 108
 Guarantee.................................................................. 109
 Asset Sale Proceeds........................................................ 109
 Change of Control.......................................................... 111
 Certain Covenants of the Company........................................... 112
 Collateral and Security.................................................... 113
 Amendment, Supplement and Waiver........................................... 114
 Events of Default.......................................................... 115
 Successor Company.......................................................... 116
 Defeasance................................................................. 116
 The New Indenture Trustee and New
  Collateral Agent.......................................................... 118
 Certain Definitions........................................................ 118
DESCRIPTION OF CAPITAL STOCK................................................ 123
DESCRIPTION OF OUTSTANDING NOTES............................................ 127
 General.................................................................... 127
 Denomination and Modification.............................................. 127
 Payments................................................................... 127
 Certain Covenants of the Company........................................... 129
 Redemption................................................................. 131
 Security................................................................... 131
 Amendment, Supplement and Waiver........................................... 132
 Events of Default.......................................................... 132
 Merger; Sale of Assets; Permitted Financings............................... 133
 Restrictions on Transfer................................................... 134
 Satisfaction and Discharge................................................. 134
 The Outstanding Note Trustee and Collateral Agent.........................  135
 Certain Definitions.......................................................  135
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................  139
 Tax Consequences to Creditors.............................................  139
 Recapture of Gain on Subsequent Sale of New Common Shares.................  141
 Tax Treatment of Holders of Outstanding Common Shares.....................  142
 Tax Consequences of Holding New Senior Notes..............................  142
 Tax Consequences of Holding New Common Shares.............................  142
 REIT Status and Taxation of Company Under the Prepackaged Plan............  142
 Additional Tax Consequences to the Company from the Prepackaged Plan......  147
FINANCIAL ADVISOR..........................................................  151
FEES AND EXPENSES..........................................................  151
ADDITIONAL INFORMATION CONCERNING THE COMPANY..............................  152
PREPACKAGED PLAN OF REORGANIZATION.......................................ANNEX A
*AMENDED AND RESTATED DECLARATION OF TRUST...............................ANNEX B
SPECIAL PURPOSE VALUATION REPORT OF KENNETH LEVENTHAL & COMPANY:
 RANGE OF GOING CONCERN VALUES...........................................ANNEX C
SPECIAL PURPOSE VALUATION REPORT OF KENNETH LEVENTHAL & COMPANY:
 RANGE OF LIQUIDATION VALUES.............................................ANNEX D
ALSO ACCOMPANYING THIS DISCLOSURE STATEMENT:
The Company's Annual Report on Form 10-K for the Year Ended September 30, 1994
The Company's Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1995
</TABLE>    
   
*To be filed by amendment     
 
                                      vii
<PAGE>
 
                             
                          INDEX OF DEFINED TERMS     
 
<TABLE>   
<CAPTION>
                                                                          PAGE
                                                                        --------
<S>                                                                     <C>
1991 Plan..............................................................        1
1992 Modifications.....................................................       27
1992 Restructuring.....................................................        1
1993 Agreement in Principle............................................        3
Additional Payment Date................................................      128
Adjusted Prime Rate....................................................      135
Adjusted Rate..........................................................       28
Administrative Claims..................................................       46
Affiliate.............................................................. 118, 135
Agreement of Understanding.............................................        5
Allowed Claim..........................................................        7
Allowed Interests......................................................       46
Amended and Restated Declaration of Trust..............................      iii
AMT....................................................................      150
AMTI...................................................................      150
April 1994 Proposal....................................................        4
Asset Sale............................................................. 118, 135
Asset Sale Account.....................................................      118
Asset Sale Offer.......................................................      109
Asset Sale Proceeds.................................................... 118, 135
Assignments of Leases..................................................      118
August Term Sheet......................................................        3
Available Cash......................................................... 119, 135
Ballot.................................................................        i
Bank of America........................................................        7
Bankruptcy Case........................................................      iii
Bankruptcy Code........................................................        i
Bankruptcy Court.......................................................        1
Bankruptcy Rules.......................................................       12
Beneficial Attribution Rules...........................................      123
Best Interests Test....................................................       23
Board of Trustees......................................................      iii
Business Day...........................................................      119
Capital Base...........................................................      136
Capital Expenditures...................................................      119
Cash Equivalents....................................................... 119, 136
Change of Control......................................................      119
Change of Control Offer................................................      111
Change of Control Payment..............................................      111
Change of Control Payment Date.........................................      111
Chapter 7..............................................................        6
Chapter 11.............................................................       ii
Claims.................................................................       ii
Class 2 Expense Claims.................................................       48
Class 3 Creditor Obligations...........................................      102
COD....................................................................       26
Code...................................................................        1
Collateral............................................................. 119, 136
Collateral Assignment of Leases........................................      119
Collateral Assignments of Mortgages....................................      120
Commission.............................................................        v
Common Shares..........................................................        i
Company................................................................        i
Completion Fee.........................................................       42
Completion Fee Balance.................................................       42
Confirmation Date......................................................       12
Confirmation Order.....................................................       50
Consolidated Net Worth.................................................      120
Constructive Ownership Limit...........................................      124
</TABLE>    
<TABLE>   
<CAPTION>
                                                                          PAGE
                                                                        --------
<S>                                                                     <C>
Constructive Ownership Rules...........................................      123
Contingent Obligation.................................................. 120, 136
Contractual Obligation.................................................      136
Creditor Obligation....................................................      127
Creditor Releasees.....................................................       11
Creditor/Shareholder Release...........................................       51
Creditors' Committee...................................................        1
Creditors' Committee Advisors..........................................        2
Debtor in Possession...................................................       56
Debtor Release.........................................................       51
Debtor Releasees.......................................................       11
Declaration of Trust...................................................       24
Default................................................................      120
Defaulted Interest.....................................................      128
Defeasance.............................................................      117
Deferred Payment.......................................................      128
Disbursing Agents......................................................       53
Disclosure Statement...................................................        i
Disputed Claim.........................................................       53
Disputed Interest......................................................       53
Dividend Overpayments..................................................      136
Earning Assets.........................................................      136
Effective Date.........................................................        i
Effective Period.......................................................      102
Entity.................................................................       56
Equities...............................................................       92
Equity Committee.......................................................        1
Equity Committee's Advisor.............................................       31
Estate.................................................................       46
Event of Default....................................................... 115, 132
Exchange Act...........................................................        v
Excluded Claims........................................................       51
Existing Holder Limit..................................................      124
Existing Holders.......................................................      124
Expiration Date........................................................        i
Feasibility Test.......................................................       22
Final Order............................................................       47
First Lien Debt........................................................      120
Foreign Shareholders...................................................      147
GAAP...................................................................  77, 120
Governmental Securities................................................      120
Guarantor..............................................................      120
Houlihan Lokey.........................................................        2
Houlihan Lokey Materials...............................................       42
Holders................................................................        i
Indebtedness........................................................... 120, 136
Information Agent......................................................        v
Initial Cash Reserve Fund..............................................       48
Instruments............................................................       54
Interested Group.......................................................        2
Interests..............................................................       11
Internal Revenue Code..................................................        1
Investment............................................................. 121, 137
Kenneth Leventhal......................................................       ii
Kenneth Leventhal Reports..............................................       40
Lease..................................................................      121
Legal Holiday..........................................................      121
Lien................................................................... 121, 137
Loss Corporation.......................................................      147
</TABLE>    
 
                                      viii
<PAGE>
 
(cover page continued)
                       
                    INDEX OF DEFINED TERMS (CONTINUED)     
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Major Holder...............................................................   3
Master Ballot..............................................................   i
Material Subsidiary........................................................ 121
Milbank....................................................................  34
Monthly Fee................................................................  41
Mortgages.................................................................. 121
Named Executive Officers...................................................  99
Net Cash Value............................................................. 137
New Collateral Agent.......................................................  53
New Collateral Documents................................................... 121
New Common Shares..........................................................   i
New Indenture Trustee...................................................... 108
New Major Holder...........................................................   5
New Monthly Fee............................................................  42
New Securities.............................................................  ii
New Senior Note Indenture..................................................  48
New Senior Notes...........................................................   i
NOLs.......................................................................  33
Non-Earning Assets......................................................... 137
Non-Earning Loans.......................................................... 137
Non-Earning Properties..................................................... 137
Notice.....................................................................  37
NYSE.......................................................................  iv
Offer Amount............................................................... 109
Offer Period............................................................... 109
Officers' Certificate...................................................... 121
Other Priority Claims......................................................  47
Other Secured Claims.......................................................  ii
Outstanding Collateral Agent...............................................  29
Outstanding Collateral Agreement...........................................  28
Outstanding Common Shares..................................................   i
Outstanding Indenture Trustee..............................................  52
Outstanding Note Indenture.................................................  28
Outstanding Note Trustee...................................................  28
Outstanding Notes..........................................................   i
Outstanding Pledge Agreement...............................................  53
Outstanding Securities.....................................................  ii
Outstanding Stock Rights...................................................  49
Ownership Limit............................................................ 123
Pension Plan............................................................... 101
Permitted Deferred Payment................................................. 128
Permitted Financing........................................................ 134
Petition Date..............................................................   i
Plan Acceptances...........................................................  ii
Plan Solicitation..........................................................   i
Pledge Agreement........................................................... 122
PNB........................................................................  92
Preferred Stock............................................................ 122
Prepackaged Plan...........................................................   i
Principal Holders..........................................................   3
Principal Holders' Advisor.................................................   3
Prior Bankruptcy Case......................................................  89
</TABLE>    
<TABLE>   
<CAPTION>
                                                                          PAGE
                                                                        --------
<S>                                                                     <C>
Prior Plan.............................................................       28
Priority Claim.........................................................       47
Priority Tax Claims....................................................       47
Projections............................................................       73
Promissory Note........................................................      137
PSE....................................................................       iv
Purchase Date..........................................................      109
Real Estate............................................................ 122, 138
Record Date............................................................        i
Record Holders.........................................................       67
Reference Rate.........................................................      138
REIT...................................................................        1
REIT Provisions........................................................      142
REIT Requirements......................................................      142
REIT Taxable Income....................................................      145
Registration Rights Agreement..........................................       48
Related Party Tenant...................................................      144
Released Claims........................................................       11
Reorganization Case....................................................      iii
Reorganization Value...................................................       79
Reorganized Debtor.....................................................       46
Required Holders....................................................... 122, 138
Required Payment Date..................................................      127
Requisite Plan Acceptances.............................................      iii
Restructure Value......................................................       42
Restructuring..........................................................        i
Retention Plan.........................................................      102
Retirement Plan........................................................      100
Reverse Stock Split....................................................        i
Savings Plan...........................................................      101
Section 382 Limitation.................................................      147
Securities Act.........................................................       iv
Security Agreement.....................................................      122
Share Trust............................................................      124
Shares-in-Trust........................................................      124
Shelf Registration.....................................................       66
Solicitation...........................................................        i
Solicitation Agent.....................................................        v
SOP 90-7...............................................................       79
Standing Instruction...................................................      110
Standstill Period......................................................       29
Stock Ownership Limit Provisions.......................................      123
Subsidiary............................................................. 122, 138
Sutro..................................................................       92
Tax Security...........................................................       19
Termination Date.......................................................      138
Title 11 Case..........................................................      148
Title 11 Exception.....................................................      148
Underlying Loan Documents..............................................      122
Underlying Mortgages................................................... 122, 138
Underlying Promissory Notes............................................      122
Unsecured Claim........................................................       ii
</TABLE>    
 
                                       ix
<PAGE>
 
 
                                    SUMMARY
   
  The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere herein and the financial statements and
the related notes thereto referred to under "Additional Information Concerning
the Company."     
 
                                  THE COMPANY
   
  The Company is a self-administered real estate investment trust (a "REIT")
that satisfies the conditions under sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code" or "Code"), and
under other applicable law that was organized in 1970 under the laws of the
State of Maryland. As of May 31, 1995, the Company had available cash of $46.5
million and invested assets consisting of 34 mortgage loans and 37 investments
in real estate located throughout the United States. For a further description
of the business of the Company, see "Business."     
   
  The Company's principal offices are located at 8380 Old York Road, Suite 300,
Elkins Park, Pennsylvania 19027-1590 and 3500 West Olive Avenue, Suite 600,
Burbank, California 91505-4628; the Company's telephone numbers are (215) 881-
1525 and (818) 953-7700, respectively.     
 
                        BACKGROUND OF THE RESTRUCTURING
   
  Previous Chapter 11 Case and 1991 Plan of Reorganization. On April 12, 1990,
the Company filed a voluntary petition for reorganization under Chapter 11 in
the United States Bankruptcy Court (the "Bankruptcy Court"). Following the
Chapter 11 filing, the United States Trustee appointed the creditors' committee
(the "Creditors' Committee") and an equity security holders' committee
representing the Company's shareholders (the "Equity Committee"). In February
1991, a Joint Plan of Reorganization (the "1991 Plan") proposed by the Company,
the Creditors' Committee and the Equity Committee was confirmed. Following
confirmation of the 1991 Plan, the Creditors' Committee and the Equity
Committee continued to represent their respective constituencies. The 1991 Plan
provided for a restructuring of the Company's outstanding indebtedness and
provided the Company with the right to defer payment of certain amounts for up
to 24 months or until December 31, 1995, when all deferred payments would be
due. The forecast on which the 1991 Plan was based assumed that real estate
markets would begin to improve in fiscal 1992. However, the markets continued
to deteriorate significantly and the Company was in danger of imminent default.
After several months of negotiations with the Creditors' Committee, the Company
completed an out-of-court restructuring of its outstanding debt in July 1992
(the "1992 Restructuring").     
          
  Pursuant to the 1992 Restructuring, the outstanding debt was restructured
through the issuance of the Outstanding Notes. The 1992 Restructuring (i)
increased the amount of principal that could be deferred (while retaining the
final payment date for deferred payments at December 31, 1995), (ii) extended
the permitted repayment period of such deferred amounts from 24 months to 30
months from the date a deferral is utilized, (iii) established 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) changed certain required financial covenants to reflect the then-existing
financial condition of the Company and then-existing real estate market
conditions, (v) provided for the release of collateral for certain financings
by the Company upon approval of the holders of 66 2/3% of the Outstanding
Notes, and (vi) provided for the payment of additional consideration to the
holders of the Outstanding Notes equal to 1% of the principal amount of the
Outstanding Notes, payable in four semi-annual installments commencing on the
date the 1992 Restructuring became effective.     
       
                                       1
<PAGE>
 
          
  The financial projections on which the 1992 Restructuring was based assumed
that the real estate markets would stop or slow their decline by 1993 and show
some improvement in 1994. Instead, since the effective date of the 1992
Restructuring, the real estate markets have failed to improve in any
significant way. The Company's business operations, including its ongoing
efforts to refinance and sell property, have not generated cash flow sufficient
to service the Outstanding Notes.     
   
  Development of the Current Restructuring. During December 1992, it became
apparent to the Company that its projected cash flow would not be adequate to
meet its debt obligations in the future. Thus, the Company began to explore
possible restructuring options for its debt obligations. In considering
possible restructuring options, the Company's goals were (i) to survive as a
going concern and preserve the Company as a real estate investment vehicle so
that the Company's shareholders could enjoy the benefits of an improved or
stabilized real estate market, and (ii) to substantially de-leverage the
capital structure of the Company. Early in 1993, the Company retained Houlihan
Lokey Howard & Zukin ("Houlihan Lokey") to advise it in connection with the
Restructuring.     
   
  Beginning in December 1993, the Company suspended all payments due in respect
of the Outstanding Notes. By March 31, 1995, the Company had defaulted in the
payment of $152.6 million of principal and $51.3 million in interest. The
Company currently has no agreement with any holders of Outstanding Notes that
suspends its obligations to pay interest, principal or other amounts due in
respect of the Outstanding Notes. On April 11, 1995, the Company paid $25.0
million in accrued interest on the Oustanding Notes, with such payment to be
credited against the cash payment of at least $50 million to be made to the
holders of the Outstanding Notes pursuant to the Prepackaged Plan. The Company
does not currently plan to make any further principal or interest payments in
respect of the Outstanding Notes prior to the Effective Date. Notwithstanding
the uncured events of default under the Outstanding Note Indenture (as
hereinafter defined), the Outstanding Notes have not been accelerated.     
       
          
  Commencing in March of 1993 and continuing through August of 1993, the
Company and the Creditors' Committee and its advisors (the "Creditors'
Committee Advisors") negotiated regarding a restructuring of the Company.
During that same time period, from time to time the Company and its counsel
apprised the Equity Committee and its advisors concerning the status of
negotiations regarding the restructuring efforts. During April, May and June of
1993, Houlihan Lokey made numerous formal and informal presentations to the
Creditors' Committee designed to focus the Creditors' Committee on
restructuring proposals that would be consistent with the Company's
restructuring goals. These presentations included, among other things,
discussions regarding the proposals submitted by potential third-party
investors and acquirors and the Company's internal restructuring proposals. See
"The Prepackaged Plan--Reports of Houlihan Lokey as Financial Advisor to the
Company--Presentations to the Creditors' Committee" and "The Prepackaged Plan--
Background of the Restructuring--Development of the Current Restructuring."
While the Company was attempting to restructure its obligations, it continued
to operate, even though it was in default, due to the lack of foreclosure
action by the Outstanding Note Trustee (as hereinafter defined).     
   
  While the Company was negotiating with the Creditors' Committee, the Company
and Houlihan Lokey also met with several prospective investors and acquirors to
discuss possible third-party investment in or sale of the Company. Although
several potential third-party investors and acquirors were offered an
opportunity to propose restructuring alternatives, only three prospective
third-party investor groups made proposals to the Company and the Creditors'
Committee (each an "Interested Group"). After reviewing the terms of these
proposals, the Creditors' Committee advised the Company that the offers were
not acceptable because the valuations of the Company reflected by such
proposals were lower than the value placed on the Company by the Creditors'
Committee and were substantially below the amount of the Outstanding Notes. As
a result, the Company suspended the solicitation of potential third-party
investors or acquirors.     
   
  On or about August 10, 1993, after extensive negotiations, the Company and
the Creditors' Committee agreed to the broad outlines of a proposed
restructuring, subject to approval by the Board of Trustees. Pursuant to the
terms of the restructuring proposal, the Outstanding Notes would be exchanged
for approximately $195 million of new senior secured notes and common stock
representing approximately 85% of the equity of the reorganized Company. The
restructuring proposal anticipated that the new notes would     
 
                                       2
<PAGE>
 
   
be issued in two series: $120 million of 7% notes maturing in 2003 with
scheduled annual principal amortization, and approximately $75 million in
additional notes payable principally from available cash flow. In addition, the
restructuring proposal provided for the payment by the Company on September 30,
1993, of all outstanding restructuring fees relating to the 1992 Restructuring
and the interest due on the Outstanding Notes, with interest to accrue
thereafter on the Outstanding Notes at 7%. Interest accruing through March 31,
1994, would be added to the principal of the new cash flow notes and any
interest accruing after March 31, 1994, would be paid at closing. Although
existing holders of the Company's Outstanding Common Shares would have retained
15% of the equity of the reorganized Company under this restructuring proposal,
the Company's remaining debt level under this proposal would have been greater
than the debt levels thought desirable by the Company.     
   
  On August 18, 1993, the Board of Trustees unanimously agreed to pursue the
restructuring proposal set forth in a draft term sheet dated August 16, 1993
(the "August Term Sheet"), subject to a number of conditions including, among
other things, the receipt by the Company of written indications of support from
members of the Creditors' Committee and additional holders of sufficient
Outstanding Notes to effect the restructuring through either a prepackaged or
prearranged plan of reorganization under Chapter 11 (the "1993 Agreement in
Principle"). After the terms of the 1993 Agreement in Principle were announced,
trading in the Outstanding Notes increased substantially. Included in the
Outstanding Notes initially traded were all of the Outstanding Notes held by
two members of the Creditors' Committee who had not been in favor of the 1993
Agreement in Principle. By November of 1993, one of the three remaining members
of the Creditors' Committee had sold all of its Outstanding Notes, part to one
of the other Creditors' Committee members and the balance to other persons.
These sales left the Creditors' Committee with two members, one of which held
in excess of 33 1/3% of the Outstanding Notes (the "Major Holder"). By December
of 1993, in excess of 50% of the principal amount of the Outstanding Notes had
traded.     
   
  In early September of 1993, the Company commenced negotiations with certain
holders who had acquired a significant portion of the Outstanding Notes
(collectively, such holders as variously constituted from time to time,
including, as of March 31, 1995, the New Major Holder (as hereinafter defined),
the "Principal Holders") and the Major Holder regarding the restructuring of
the Company. By the end of November of 1993, the Company had still not received
written indications of support for the 1993 Agreement in Principle from any
holders of Outstanding Notes. Thereafter, the Company suspended all actions to
implement the terms of the 1993 Agreement in Principle and resumed responding
to inquiries from third parties regarding participation in a restructuring of
the Company.     
   
  In early December of 1993, an investment banking firm retained by the
Principal Holders (the "Principal Holders' Advisor") presented an oral analysis
that included a valuation of the Company at approximately $230 million, an
amount below the values thought reasonable at the time by the Company and the
two remaining members of the Creditors' Committee. Throughout December of 1993
and January of 1994, the Company attempted to bridge the gap in valuations
placed on the Company by the various creditor groups.     
   
  From December of 1993 to November of 1994, the Creditors' Committee, the
Major Holder and the Principal Holders attempted to negotiate a consensual plan
to restructure the Company. The Major Holder and the Principal Holders,
however, had different views regarding how the restructuring of the Company
should be handled. The Principal Holders preferred a substantially de-leveraged
Company while the Major Holder preferred substantial levels of senior debt.
       
  On December 13, 1993, the Major Holder submitted a restructuring proposal
that was the basis for a draft term sheet, dated December 14, 1993, prepared by
the Company. At a meeting of the Board of Trustees held on December 15, 1993,
the Company and the Board of Trustees discussed the draft term sheet and the
negotiating stance the Company might assume based on the concepts in the Major
Holder's proposal that the Company considered to be most important.     
   
  Throughout the second and third quarters of fiscal 1994, the Company's
management and advisors continued discussions with the Major Holder, the
Principal Holders and their representatives to explore    

                                       3
<PAGE>
 
   
various alternatives for restructuring the Outstanding Notes that would resolve
the impasse between the Major Holder and the Principal Holders. At a meeting of
the Board of Trustees held on April 20, 1994, the Board of Trustees considered
a term sheet for a prepackaged reorganization plan based on a court-approved
valuation of the Company (assumed to be $230 million). Under this proposal,
Outstanding Note holders would be issued new senior convertible notes equal in
aggregate principal amount to the court-approved value of the Company,
whereupon the Principal Holders would convert their notes into shares
representing 100% of the common stock of the reorganized Company and give
shares representing 4% of the equity of the reorganized Company to the existing
shareholders (the "April 1994 Proposal"). For a more detailed discussion of the
April 1994 Proposal, see "The Prepackaged Plan--Background of the
Restructuring--Development of the Current Restructuring." The Major Holder,
however, would not agree to the April 1994 Proposal because, among other
things, the reorganized Company would not retain debt levels satisfactory to
the Major Holder.     
   
  In May and June of 1994, the Creditors' Committee, the Principal Holders and
the Company had several contacts with the Equity Committee to attempt to reach
agreement on a consensual plan to restructure the Company. Such attempts,
however, proved unsuccessful because of the inability to agree upon the terms
of a mutually acceptable restructuring.     
   
  In June of 1994, at the Principal Holders' request, the Company retained
Kenneth Leventhal to perform a special purpose valuation and to provide such
valuation analysis to the Creditors' Committee, the Principal Holders and the
Equity Committee. The Board of Trustees agreed to retain Kenneth Leventhal
because it believed that it would be worth the additional expense if such an
additional special purpose valuation might lead to the negotiation of a
consensual agreement among the creditors and also result in fair treatment of
the shareholders.     
   
  On or about September 14, 1994, the Company's advisors, the Equity
Committee's advisors and counsel to the Principal Holders met in a final
attempt to negotiate the treatment of equity in the context of a prepackaged
plan of reorganization based on the April 1994 Proposal. At this meeting, the
Company and the Principal Holders outlined the terms of the April 1994 Proposal
with the Equity Committee's advisors in order to determine whether the Equity
Committee would accept 4% of the common stock of the reorganized Company. At
the conclusion of the meeting, the Equity Committee's advisors agreed to
recommend to the Equity Committee that it accept one of the following two
proposals: (i) 5% of the common stock of the reorganized Company and warrants
to purchase new common shares representing 7 1/2% of the common stock of the
reorganized Company; or (ii) 4% of the common stock of the reorganized Company
and warrants to purchase new common shares representing 10% of the common stock
of the reorganized Company.     
   
  On October 4, 1994, Kenneth Leventhal produced its special purpose valuation
report, which placed the Company's approximate going concern value as of July
1, 1994, between $255 million and $275 million. Because Kenneth Leventhal's
report placed the Company's value higher than the $230 million value assumed by
the April 1994 Proposal, the Principal Holders decided to abandon the April
1994 Proposal. Thus, the Company renewed its efforts to negotiate a deal with
the Principal Holders that was acceptable to the Equity Committee. The Company,
the Principal Holders and the Equity Committee, however, were unable to reach
agreement on the terms of a restructuring due, among other things, to the
inability to agree on the respective shareholdings of the holders of
Outstanding Notes and the existing shareholders after giving effect to the
issuance of new shares in a restructuring.     
   
  On or about October 27, 1994, the Major Holder and the Principal Holders
submitted a proposal for a prepackaged restructuring of the Company. Pursuant
to the proposal, the Company would retain all of its assets and have between
$10 million and $15 million of cash following the restructuring. The
Outstanding Notes would be exchanged for $110 million of new senior secured
notes and 98% of the common stock of the reorganized Company. Common stock
retained by the existing shareholders would represent 2% of the reorganized
Company's common stock. Thereafter, the Company and Houlihan Lokey spent
several weeks negotiating with such holders regarding the proposed equity split
between the holders of Outstanding Notes and the existing shareholders.     
 
                                       4
<PAGE>
 
   
  In November of 1994, the Company reached a non-binding agreement in principle
with the Major Holder and the Principal Holders. Pursuant to the agreement in
principle, upon shareholder approval for a prepackaged Chapter 11
reorganization, holders of the Outstanding Notes would receive (i) $110 million
of new senior secured notes due 2002, (ii) approximately $50 million in cash,
and (iii) common stock representing 97% of the common stock of the reorganized
Company (or, if the Company's existing shareholders did not vote to accept the
Prepackaged Plan, substantially all of the common stock of the reorganized
Company). The existing shareholders would retain their shares, which would
represent the remaining 3% of the reorganized Company's common stock, provided
that they voted to accept the Prepackaged Plan. The holders of unsecured claims
would receive cash in the allowed amount of their respective claims.     
   
  On November 16, 1994, the Board of Trustees unanimously approved the proposed
Restructuring, subject to approval by the Board of Trustees of the final
documentation necessary to effect the restructuring. On November 17, 1994, the
Company announced that it had reached a non-binding agreement in principle with
the Major Holder and the Principal Holders for the Restructuring.     
   
  On November 22, 1994, the Equity Committee gave notice that it had dissolved,
claiming, among other things, that the Company had not involved the Equity
Committee or its advisors in the development of the Restructuring and that the
Equity Committee was unable to conclude that the Restructuring was fair or
equitable to the Company's shareholders. On November 29, 1994, the Company
informed the Equity Committee that the Company disagreed with many of the
purported factual statements contained in the Equity Committee's notice and
that the Company believed that the notice was misleading.     
   
  Subsequent Developments. On March 15, 1995, the Major Holder sold all of its
Outstanding Notes to one of the Principal Holders who, after giving effect to
such sale, held an aggregate principal amount of $133.8 million or
approximately 46.1% of the Outstanding Notes (the "New Major Holder"). This
change in holdings of Outstanding Notes had no material effect on the terms of
the previously negotiated non-binding agreement in principle among the Company,
the Major Holder and the Principal Holders. In April 1995, the Company and the
Principal Holders entered into an agreement of understanding (the "Agreement of
Understanding") pursuant to which the Company agreed to distribute to the
holders of Outstanding Notes $25.0 million in cash prior to the Petition Date.
Under this agreement, the Principal Holders, among other things, agreed to vote
when solicited in favor of the Prepackaged Plan. On April 11, 1995, the Company
paid $25.0 million pursuant to the Agreement of Understanding, with such
payment to be credited against the cash payment of at least $50 million to be
made to the holders of the Outstanding Notes pursuant to the Prepackaged Plan.
       
  For further information regarding the background and development of the
Restructuring, see "The Prepackaged Plan--Background of the Restructuring."
    
                         PURPOSES OF THE RESTRUCTURING
   
  The Restructuring is necessary to make it possible for the Company to satisfy
its outstanding obligations and remain in business. Currently, the Company's
capital structure is highly leveraged and the Company is unable to meet its
substantial debt service requirements. The Restructuring is intended to enhance
the long-term viability of the Company by adjusting the Company's
capitalization to reduce the principal amount, extend the maturities and adjust
the interest rates on the Company's debt, thereby reducing the Company's debt
service obligations so that such obligations may be paid out of the Company's
operating cash flow and cash reserves. The Restructuring is designed to allow
the Company to continue to operate and expand its business without the need for
further financial restructuring, and to be able to obtain additional financing
or equity infusions or to enter into other financial transactions in the future
when and as management and the Board of Trustees so determine. The Company is
currently in default in payment of interest, principal and     
 
                                       5
<PAGE>
 
   
other amounts due on the Outstanding Notes, and the Company has no agreement
with any holders of Outstanding Notes that it is not required to pay such
amounts. Consequently, there can be no assurance that the Outstanding Note
Trustee and the Outstanding Collateral Agent will not take remedial or
enforcement action with respect to the Outstanding Notes, including
acceleration of the Outstanding Notes and foreclosure. If the Restructuring is
not consummated, based upon Kenneth Leventhal's analysis of the Company's range
of enterprise going concern value of $265 million to $285 million and range of
liquidation value of $220 million to $260 million, holders of Claims may not
receive cash or securities of the same value and having as favorable terms as
under the Prepackaged Plan, and holders of Outstanding Common Shares may not
receive or retain anything in the event of a foreclosure, nonconsensual
bankruptcy or liquidation. Through the Restructuring, the Company intends to
maximize the recovery to holders of Outstanding Notes and other Claims while
also maximizing the return to holders of Outstanding Common Shares.     
   
  The Company believes that the Restructuring is a significantly more
attractive alternative than a traditional bankruptcy case. The Company believes
that acceptance of the Prepackaged Plan before a bankruptcy case is commenced
will be more beneficial to the Company and all of its creditors, holders of
Outstanding Common Shares and other constituencies than seeking to obtain
acceptance of a plan of reorganization after commencement of a bankruptcy case.
The Company believes that the Prepackaged Plan would reduce the risks of
litigation, minimize disputes during the bankruptcy case concerning the
reorganization of the Company, significantly shorten the time required to
accomplish the reorganization, reduce the expenses of a case under Chapter 11,
minimize the disruption of the Company's business that would result from a
protracted and contested bankruptcy case and therefore result in a larger
distribution to creditors of the Company and recovery on investments of holders
of Outstanding Common Shares than would other types of reorganization under
Chapter 11 or a liquidation under Chapter 7 of the Bankruptcy Code ("Chapter
7"). See "The Prepackaged Plan."     
   
  After giving effect to the Restructuring as if it had occurred at the
beginning of the fiscal year 1994, the Company anticipates that its annual
interest expense would have been reduced by approximately $19.1 million as a
result of a lower interest rate and reduced principal amount outstanding on the
New Senior Notes compared to the Outstanding Notes. In addition, the New Senior
Notes will have a longer maturity than the Outstanding Notes and will contain
no scheduled amortization requirements. The Restructuring will also reduce the
Company's overall debt obligations from approximately $322.9 million (including
accrued but unpaid interest) on the Outstanding Notes, as of May 31, 1995, to
approximately $110 million. The Company's management believes that, based on
its financial projections, after giving effect to the Restructuring, the
Company will have sufficient operating cash flow to pay cash interest and
scheduled amortization on all of its outstanding indebtedness and fund
anticipated capital expenditures. See "Financial Projections." There can be no
assurance, however, that targeted levels of operating cash flow will actually
be achieved. See "Special Factors and Certain Considerations."     
                         
                      EFFECTS OF THE PREPACKAGED PLAN     
   
  The following summary of the effects of the Prepackaged Plan is qualified in
its entirety by reference to all the provisions of the Prepackaged Plan set
forth as Annex A to this Disclosure Statement.     
          
  Effects on Holders of Outstanding Notes. Pursuant to the Prepackaged Plan,
the Outstanding Notes will be exchanged for (a) $110,000,000 in aggregate
principal amount of New Senior Notes, (b) at least $50,000,000 in cash less any
amounts paid between March 1, 1995, and the Petition Date pursuant to the
Agreement of Understanding (plus such additional amount, if any, based upon
cash available in excess of the Initial Cash Reserve Fund (as hereinafter
defined) and (c) assuming the class of holders of Outstanding Common Shares
accept the Prepackaged Plan, approximately 10,890,180 New Common Shares (which
will     
 
                                       6
<PAGE>
 
aggregate 97% of the fully diluted Common Shares outstanding after the
Restructuring). The New Senior Notes and the New Common Shares will differ from
the Outstanding Notes in the following respects, among others:
     
  . The principal amount of the Outstanding Notes will be reduced from
   approximately $322.9 million (including accrued but unpaid interest) to
   $110 million under the New Senior Notes.     
     
  . The New Senior Notes will be guaranteed by the Subsidiaries (as defined
   in the New Senior Note Indenture) of the Company.     
     
  . The New Senior Notes will have a fixed interest rate. Interest on the New
   Senior Notes will accrue at 11-1/8% per annum. Interest on the Outstanding
   Notes is payable at the reference rate of Bank of America National Trust
   and Savings Association ("Bank of America") plus a margin. The interest
   rate as of January 1, 1995, was the reference rate plus 4.0% (12.5%)
   increasing to the reference rate plus 4.25% on July 1, 1995. Interest on
   deferred principal of Outstanding Notes is payable at such adjusted rate
   plus two percent.     
     
  . Assuming confirmation of the Prepackaged Plan, holders of the Outstanding
   Notes will receive, in the aggregate, approximately 10,890,180 New Common
   Shares constituting 97% of the fully diluted Common Shares outstanding
   after consummation of the Restructuring.     
   
  For a more detailed discussion of the terms of the New Senior Notes and the
New Common Shares, see "Description of New Senior Notes" and "Description of
Capital Stock," respectively.     
   
  Effects on Holders of Outstanding Common Shares. Pursuant to the Prepackaged
Plan, if the class of holders of Outstanding Common Shares votes in favor of
the Prepackaged Plan, each holder of Outstanding Common Shares will retain its
Common Shares in the Company. Pursuant to the Reverse Stock Split to be
effected as part of the Restructuring, each 33.33 Outstanding Common Shares
automatically will become one Common Share. In addition, the issuance of
approximately 10,890,180 New Common Shares to holders of Outstanding Notes
pursuant to the Prepackaged Plan will reduce the percentage common equity
ownership of holders of Outstanding Common Shares from 100% to 3%. If the class
of holders of Outstanding Common Shares does not vote in favor of the
Prepackaged Plan, however, all Outstanding Common Shares will be cancelled and
holders of Outstanding Common Shares will not receive or retain anything under
the Prepackaged Plan.     
   
  Effects on Holders of Other Secured Claims. Pursuant to the Prepackaged Plan,
holders of Other Secured Claims that are also Allowed Claims (as defined below)
will (at the option of the Company and with the consent of the Principal
Holders) (i) be paid in full in cash on the Effective Date (or as soon as
practicable after the date on which any such Claim is allowed if the date of
allowance is later than the Effective Date), (ii) be paid upon such other terms
as may be mutually agreed upon by the Company and the holder of such Claim,
with the consent of the Principal Holders, or (iii) be reinstated and paid or
performed by the Company in accordance with section 1124 of the Bankruptcy
Code, or the legal, equitable and contractual rights to which such Claim
entitles the holder of such Claim shall be left unaltered. "Allowed Claim"
means a claim to the extent that (a)(i) a proof of the Claim was or is timely
filed or deemed timely filed under applicable law or by order of the Bankruptcy
Court or (ii) if no proof of Claim is filed, the Claim is scheduled as
liquidated, undisputed, and noncontingent, and (b)(i) the Claim is not a
disputed Claim (but only to the extent that such Claim is not a disputed
Claim), (ii) the Claim is allowed by a final order (but only to the extent
allowed), or (iii) the Claim is allowed under the Prepackaged Plan, but only to
the extent allowed.     
   
  Effects on Holders of Unsecured Claims. Pursuant to the Prepackaged Plan,
each holder of an Unsecured Claim that is also an Allowed Claim will receive
cash equal to the amount of such Claim unless such holder agrees to less
favorable treatment.     
 
                                       7
<PAGE>
 
   
  Common Share Ownership. The following table shows the ownership (as between
holders of Outstanding Common Shares and holders of Outstanding Notes) of the
Company's Common Shares before and after consummation of the Restructuring
(assuming confirmation of the Prepackaged Plan).     
 
<TABLE>   
<CAPTION>
                           COMMON SHARES BEFORE     COMMON SHARES AFTER            COMMON
                           REVERSE STOCK SPLIT    REVERSE STOCK SPLIT BUT       SHARES AFTER
                             OR CONSUMMATION      BEFORE CONSUMMATION OF        CONSUMMATION
                           OF THE RESTRUCTURING    THE RESTRUCTURING (A)  OF THE RESTRUCTURING (B)
                         ------------------------ ----------------------- ------------------------
<S>                      <C>        <C>           <C>       <C>           <C>        <C>
                         NUMBER OF   PERCENT OF   NUMBER OF  PERCENT OF   NUMBER OF   PERCENT OF
                           SHARES   COMMON SHARES  SHARES   COMMON SHARES   SHARES   COMMON SHARES
                         ---------- ------------- --------- ------------- ---------- -------------
Holders of Outstanding
 Notes..................    -0-          -0-         -0-         -0-      10,890,180      97%
Holders of Outstanding
 Common Shares.......... 11,226,215     100%       336,820      100%       336,820        3%
</TABLE>    
- --------
(a) These columns are provided for illustrative purposes only. The Reverse
    Stock Split is conditioned upon the consummation of the Restructuring,
    including issuance of the New Common Shares, and will be effected
    immediately prior to such issuance. The Reverse Stock Split will not be
    effected if the Restructuring is not consummated.
(b) Assumes holders of Outstanding Common Shares vote to approve the
    Prepackaged Plan.
   
  Accrued Interest and Unpaid Mandatory Principal Redemption on Outstanding
Notes. Accrued but unpaid interest and unpaid mandatory principal payments on
Outstanding Notes to the date on which New Senior Notes are issued in exchange
therefor will not be paid to holders of Outstanding Notes. The Prepackaged Plan
provides that if the sum of consideration being distributed in exchange for the
Outstanding Notes is less than the aggregate amount of the principal and
accrued but unpaid interest due on the Outstanding Notes, such distribution
will be applied first to principal and then to accrued but unpaid interest.
       
  Corporate Governance Matters. Pursuant to the Prepackaged Plan, as of the
Effective Date, the Board of Trustees initially will consist of seven members,
one of whom will be the new President and Chief Executive Officer of the
Company, one of whom will be selected by the New Major Holder, and the
remaining five of whom will be selected by the Principal Holders. At each
election of the Board of Trustees subsequent to the Effective Date, the Board
of Trustees will be elected by vote of the Common Shares. See "The Prepackaged
Plan--Summary of Other Provisions of the Prepackaged Plan--Officers and
Trustees" and "Management" for information regarding the new President and
Chief Executive Officer and the new Board of Trustees.     
                     
                  RECOMMENDATION OF THE BOARD OF TRUSTEES     
   
  On November 16, 1994, the Board of Trustees met to consider the proposed
Restructuring. In connection therewith, the Board of Trustees heard
presentations from the Company's management and the Company's financial and
legal advisors describing the discussions, negotiations and alternative
proposals leading to the Restructuring. At the request of the Board of
Trustees, the Company's management and financial advisors described the
feasibility of the Restructuring and its effect on the Company's capital
structure and cash flow problems. In addition, the Board of Trustees discussed
other restructuring alternatives available to the Company. After lengthy
consideration and discussion of these matters, the Board of Trustees voted
unanimously to approve in principle the terms of the Restructuring, subject to
approval by the Board of Trustees of the final documentation required to
implement the Restructuring and to confirm the Prepackaged Plan, and to
authorize management to proceed with the steps necessary to effect the
Restructuring.     
   
  The Board of Trustees has unanimously approved the Restructuring and the
transactions contemplated thereby and recommends that all Holders, including
holders of Outstanding Common Shares, vote in favor of the Restructuring and
the transactions contemplated thereby. The Board of Trustees approved
    
                                       8
<PAGE>
 
   
the Restructuring because it believes that the Restructuring is necessary to
make it possible for the Company to satisfy its outstanding obligations and
remain in business and provide the shareholders with the best opportunity to
receive any value or recovery, having determined that the Restructuring is fair
to the unaffiliated Holders of the Company's Outstanding Securities and other
Claims and Interests.     
   
  In considering the Restructuring, the Board of Trustees considered, among
other things, the factors set forth below.     
     
  .  The Board of Trustees' familiarity with the Company's business,
     operations and financial condition and its future prospects, including
     the financial difficulties facing the Company and the inability of the
     Company to secure adequate financing for its ongoing operations as long
     as the Outstanding Notes remained outstanding.     
     
  .  The fact that consummation of the Restructuring appeared to be the only
     viable way for the Company to deal with its outstanding obligations and
     continue to operate its business.     
     
  .  The fact that the Company's range of enterprise going concern value and
     liquidation value are in each case substantially less than the Company's
     liabilities.     
     
  .  The Board of Trustees' review of monthly reports on the status of the
     Restructuring, as presented by the Company's financial and legal
     advisors, as well as valuations of the Company reflected from time to
     time in the various proposals of the Interested Groups, the Major Holder
     and the Principal Holders.     
     
  .  Presentations by the Company's management and its legal advisors, each
     of whom reviewed various considerations with the Board of Trustees. In
     particular, the Board of Trustees noted that based on the valuations of
     the Company prepared by Houlihan Lokey, the special purpose valuations
     prepared by Kenneth Leventhal and management's internal analyses,
     foreclosure or a liquidation of the Company would yield a much smaller
     return to the Holders and would leave nothing for the holders of the
     Outstanding Common Shares.     
     
  .  Presentations by Houlihan Lokey and the results of discussions with
     other parties concerning proposals for the Restructuring and potential
     alternatives to the Restructuring. In particular, the Board of Trustees
     placed substantial weight on the tentative willingness of certain third
     parties to invest in the Company upon consummation of the Restructuring
     and the unwillingness of such investors to make a capital investment in
     the Company absent successful completion of the Restructuring in the
     form presented.     
     
  .  The historical and current market prices of the Company's Outstanding
     Common Shares, as well as the net book value of the Company's assets per
     share, both before giving effect to the Restructuring and on a pro forma
     basis after giving effect to the Restructuring, and when compared to a
     liquidation of the Company.     
     
  .  The fact that the Major Holder and the Principal Holders had retained
     separate financial and legal advisors, had negotiated at arm's-length
     with the Company and its financial and legal advisors after a review of
     the Company and its prospects and had agreed upon the terms of the
     Restructuring in preference to a liquidation or other alternatives.     
   
  Based on the foregoing, the Board of Trustees determined that the
Restructuring was fair to the Holders and determined to recommend approval of
all elements of the Restructuring.     
 
                                       9
<PAGE>
 
             
          SPECIAL PURPOSE VALUATION REPORTS OF KENNETH LEVENTHAL     
   
  In June of 1994, Kenneth Leventhal was engaged to prepare a special purpose
valuation of the Company and its investment portfolio in order to assist the
Company and its various interested creditor parties in determining an
appropriate basis for valuation of a potential restructuring transaction. The
Company selected Kenneth Leventhal to perform such special purpose valuation at
the request of the Principal Holders and because of Kenneth Leventhal's
qualifications, expertise and reputation in the area of financial restructuring
and real estate due diligence and valuation. Also, Kenneth Leventhal was
familiar with the Company's portfolio as a result of a comprehensive due
diligence investigation of all assets in the Company's portfolio undertaken in
early 1993 on behalf of a potential equity investor and for the use and benefit
of such potential investor.     
   
  On October 4, 1994, Kenneth Leventhal produced a report which placed the
Company's going concern value as of July 1, 1994, between $255 million and $275
million and its liquidation value between $210 million and $240 million. At the
Company's request, in April and May of 1995, Kenneth Leventhal updated its
analysis using the same methodology as that used to prepare its October 1994
report. On May 31, 1995, Kenneth Leventhal provided the Company with updated
reports dated May 15, 1995, that placed the Company's going concern value as of
March 31, 1995, between $265 million and $285 million and its liquidation value
between $220 million and $260 million. Kenneth Leventhal's May 15, 1995 reports
are included in this Disclosure Statement as Annexes C and D. Kenneth Leventhal
has granted its consent to the use of its reports included as Annexes C and D
to this Disclosure Statement.     
   
  In preparing its valuations, the Company instructed Kenneth Leventhal to
determine the valuation of the Company's portfolio on a going concern basis.
The assumptions utilized by the Company and reviewed by Kenneth Leventhal
included normal collection of amounts due on mortgage loans and cash flow from
operating properties. To determine a going concern valuation, the assumptions
were predicated on the orderly collection and selected disposal of assets over
a period of several years. Moreover, Kenneth Leventhal's going concern
valuation was not reflective of values which would result from a distressed
sale, forced liquidation, or disposition of the portfolio in a bulk sale or any
other accelerated manner. In addition to these specific portfolio valuation
procedures, the Company further instructed Kenneth Leventhal to approximate a
range of valuation for the total enterprise as of July 1, 1994, and later as of
March 31, 1995, utilizing the Company's most recently available financial
statements.     
   
  In conducting its special purpose valuations, Kenneth Leventhal obtained
selected publicly-available financial information prepared by the Company as of
June 30, 1994, and later as of March 31, 1995. Utilizing this information,
Kenneth Leventhal selected 26 assets representing mortgage loans, investments,
in-substance foreclosure assets and real estate equities owned. The selection
was divided between the West Coast and East Coast portfolios and generally
represented the highest dollar values in the portfolios. In addition, the
selection of assets included different asset classifications.     
   
  Utilizing the portfolio so selected, Kenneth Leventhal, among other things,
(i) obtained the most recent "Argus" property cashflow projections for the
properties selected, (ii) obtained, where applicable, the most recent operating
rent roll and other financial information relative to the assets selected,
(iii) obtained the most recent appraisals, where applicable and available, (iv)
obtained the previous Kenneth Leventhal analyses performed as of March 1993 and
July 1994, (v) discussed the current status with the respective asset manager
to determine loan status, property characteristics, current occupancy, existing
market rental rates, new leases, current payoff discussions and asset sales,
(vi) reviewed limited market information for the properties, (vii) modified the
Company's assumptions, as necessary, to conform to certain known current market
conditions and Kenneth Leventhal's understanding of the assets, (viii) updated
the valuation model prepared by Kenneth Leventhal in 1993 and 1994 utilizing
current market and/or assumption modifications determined from the procedures
provided above, and (ix) calculated estimated asset values on both a going
concern and liquidation value basis.     
 
                                       10
<PAGE>
 
   
  For a more complete discussion of the Kenneth Leventhal reports, see "The
Prepackaged Plan--Special Purpose Valuation Reports of Kenneth Leventhal."     
       
                             THE PLAN SOLICITATION
   
  Solicitation of Acceptances of the Prepackaged Plan. The Company will not
hold a meeting to vote on the Prepackaged Plan. Rather, the Company is
soliciting acceptances of the Prepackaged Plan by means of Ballots and Master
Ballots. Any Holder who wishes to vote with respect to the Prepackaged Plan
should complete, sign and return the applicable Ballot or Master Ballot in
accordance with the instructions set forth in this Disclosure Statement. See
"The Plan Solicitation; Voting Procedures."     
   
  The Company is soliciting acceptances of the Prepackaged Plan from holders of
Claims or interests of any equity security holder, as defined in section
101(17) of the Bankruptcy Code, of the Company, whether or not asserted,
including an interest arising out of any Outstanding Stock Rights ("Interests")
in Class 2 (Outstanding Notes), Class 3 (Other Secured Claims), Class 4
(Unsecured Claims) and Class 5 (Outstanding Common Shares). A vote in favor of
the Prepackaged Plan may only be used by the Company for the Prepackaged Plan
as it may be amended in accordance with the Prepackaged Plan and approved by
the Bankruptcy Court.     
   
  If, by the Expiration Date, the Requisite Plan Acceptances have been received
from holders of Outstanding Notes, the Company currently intends to commence a
Reorganization Case by filing a voluntary petition for relief under Chapter 11
of the Bankruptcy Code and to use the Ballots and Master Ballots solicited
pursuant to this Disclosure Statement to seek confirmation of the Prepackaged
Plan under Chapter 11 of the Bankruptcy Code as promptly as possible. Plan
Acceptances will be irrevocable upon filing of the Prepackaged Plan unless
permission of the Bankruptcy Court is received to withdraw such acceptances.
       
  The Ballots provide that a holder of a Claim or Interest may opt out of the
release otherwise effected by the Prepackaged Plan of (i) the Creditors'
Committee formed under the Prior Plan, each holder of a Claim or Interest, and
each of the officers, trustees, employees, members and professionals of such
committee or holder (collectively, the "Creditor Releasees") and (ii) the
Company, the Reorganized Debtor, the Creditors' Committee under the Prior Plan,
the Principal Holders, the New Major Holder, and their respective officers,
directors, employees, members and professionals (collectively, the "Debtor
Releasees"). Pursuant to the Prepackaged Plan, the Creditor Releasees would be
released from any Released Claims (as defined below) that the Company may have
against any of them and the Debtor Releasees would be released from any
Released Claims that any holder of a Claim or Interest may have against any of
the Debtor Releasees and from any and all actions, causes of action, claims
liabilities, demands and obligations of any kind or nature whatsoever that the
Company or any holder of a Claim or Interest may have against any of the Debtor
Releasees. Such Released Claims include, without limitation, Claims under the
federal securities laws. A holder of a Claim or Interest may elect not to grant
such release and such release would not be enforceable against such holder, and
such holder would not be a Creditor Releasee and would not, therefore, be
released from Released Claims. "Released Claims" means any and all actions,
causes of action, claims, liabilities, demands, and obligations of any kind or
nature whatsoever that are based upon or that arise out of any act or omission
that is related to the Bankruptcy Case or that are made in connection with or
relate to negotiating, formulating, implementing, confirming, or consummating
the Prepackaged Plan or this Disclosure Statement; provided, however, that the
term "Released Claims" shall not include any Excluded Claim (as hereinafter
defined).     
   
  If the Prepackaged Plan is confirmed by the Bankruptcy Court, all holders of
Claims and Interests will receive or retain the same consideration as all other
holders of Claims and Interests, respectively, whether or not such holder voted
to accept the Prepackaged Plan. Upon confirmation, the Prepackaged Plan will be
binding upon all holders of Claims and Interests regardless of whether or not
such holders voted to accept the Prepackaged Plan.     
 
                                       11
<PAGE>
 
   
  Voting on the Prepackaged Plan. As disclosed above, the Prepackaged Plan
designates six separate classes of Claims and Interests. See "The Prepackaged
Plan--Classification and Treatment of Claims and Interests." Five classes are
impaired. The Company is soliciting the votes of four of those classes. The
other impaired class (Class 6 Outstanding Stock Rights) will not receive any
distribution under the Prepackaged Plan, is deemed to reject the Prepackaged
Plan and, therefore, is not being solicited to vote on the Prepackaged Plan. To
vote on the Prepackaged Plan, Holders must follow the procedures set forth
under "The Plan Solicitation; Voting Procedures--How to Vote."     
   
  For the Prepackaged Plan to be confirmed (unless "cramdown" procedures are
utilized as to a class of Holders entitled to vote on the Prepackaged Plan),
the Bankruptcy Code requires, among other things, that the Prepackaged Plan be
accepted by the (i) holders of two-thirds in principal amount and more than
one-half in number in each class of holders of Outstanding Notes, Other Secured
Claims and Unsecured Claims voting on the Prepackaged Plan, and (ii) holders of
at least two-thirds of the Outstanding Common Shares in such class who vote on
the Prepackaged Plan. Because only votes actually cast on the Prepackaged Plan
are counted, the Company may obtain the Requisite Plan Acceptances with the
acceptance of the Prepackaged Plan by substantially less than two-thirds of the
holders of Outstanding Common Shares, or by substantially less than one-half in
number and two-thirds in principal amount of the holders of Outstanding Notes,
Other Secured Claims and Unsecured Claims.     
   
  If a class of Holders entitled to vote on the Prepackaged Plan does not
accept the Prepackaged Plan, the Company may, with the consent of the Principal
Holders, nevertheless seek confirmation of the Prepackaged Plan from the
Bankruptcy Court by employing the "cramdown" procedures set forth in section
1129(b) of the Bankruptcy Code. Under "cramdown," the Prepackaged Plan may be
confirmed despite the lack of sufficient acceptances from one or more impaired
classes voting on the Prepackaged Plan if the Bankruptcy Court determines that
the requirements of section 1129(b) of the Bankruptcy Code are met. See
"Special Factors and Certain Considerations--Considerations Relating to the
Prepackaged Plan--Nonconsensual Confirmation" and "The Prepackaged Plan--
Confirmation of the Prepackaged Plan--Nonconsensual Confirmation."     
   
  Confirmation of the Prepackaged Plan. If the Requisite Plan Acceptances are
received from the holders of Outstanding Notes and the Company seeks to
implement the Prepackaged Plan by commencing a reorganization case under
Chapter 11 of the Bankruptcy Code, the Company will request that the Bankruptcy
Court hold a confirmation hearing as promptly as practicable, upon such notice
to the parties in interest as is required by the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and the Bankruptcy
Court. Parties in interest will receive notice of the date and time fixed by
the Bankruptcy Court for the confirmation hearing. The Bankruptcy Court will
also establish procedures for the filing and service of objections to
confirmation of the Prepackaged Plan.     
   
  In order to confirm the Prepackaged Plan, the Bankruptcy Code requires, among
other things, that the Bankruptcy Court find that confirmation of the
Prepackaged Plan is not likely to be followed by the need for further financial
reorganization of the Company. The Company believes that, with the substantial
reduction in outstanding debt, the conversion of a substantial amount of debt
to equity and the extended maturity and revised mandatory redemption schedule
and the reduction in interest payments, the Company will possess sufficient
resources and working capital to operate the Company's business and repay the
New Senior Notes. See "The Prepackaged Plan--Confirmation of the Prepackaged
Plan--Feasibility Test." In addition, the Bankruptcy Code requires that each
holder of a Claim or Interest in an impaired class must either (i) accept the
Prepackaged Plan, or (ii) receive or retain under the Prepackaged Plan cash or
property of a value, as of the date on which the Bankruptcy Court enters the
order confirming the Prepackaged Plan pursuant to section 1129 of the
Bankruptcy Code on its docket (the "Confirmation Date"), that is not less than
the value such Holder would receive or retain if the Company was liquidated
under Chapter 7 of the Bankruptcy Code on such date. As set forth in "The
Prepackaged Plan--Confirmation of the Prepackaged Plan--Best Interest     
 
                                       12
<PAGE>
 
   
of Creditors Test; Liquidation Value" and "The Prepackaged Plan--Confirmation
of the Prepackaged Plan--Comparative Analysis," the Company believes that the
members of the classes of impaired Claims and impaired Interests (i.e., the
holders of Outstanding Notes, Outstanding Common Shares, Other Secured Claims
and Unsecured Claims) will receive or retain more pursuant to the Prepackaged
Plan than they would receive in a Chapter 7 liquidation.     
                   
                SPECIAL FACTORS AND CERTAIN CONSIDERATIONS     
   
  Acceptance of the Prepackaged Plan and ownership of the Company's Common
Shares involves a high degree of risk. Prior to deciding whether and how to
vote in the Prepackaged Plan, each Holder should consider carefully all the
information contained in this Disclosure Statement, including the factors
mentioned below and more fully described in "Special Factors and Certain
Considerations."     
     
  .  Financial Condition of the Company; Liquidity. Since December of 1993,
     the Company has defaulted in the payment of $152.6 million of principal
     and approximately $51.3 million of interest in respect of the
     Outstanding Notes. The Company has no standstill agreement in effect
     with the holders of the Outstanding Notes, and the Outstanding Note
     Trustee could at any time accelerate such notes and/or exercise other
     rights and remedies available to such holders, including foreclosure on
     the Company's assets. See "Special Factors and Certain Considerations--
     Financial Condition of the Company; Liquidity."     
     
  .  Continuing Leverage. The Company will continue to be highly leveraged
     after the Restructuring, requiring significant cash for debt service,
     and its ability to borrow additional funds will be limited by the New
     Senior Note Indenture (as hereinafter defined). Moreover, the New Senior
     Note Indenture requires the Company to maintain certain ratios and other
     measures of financial performance. See "Special Factors and Certain
     Considerations--Continuing Leverage."     
     
  .  Foreclosure and Bankruptcy Alternatives. The Company believes that any
     bankruptcy case other than the bankruptcy case contemplated pursuant to
     the Prepackaged Plan would have a material adverse effect on the
     Company, and its creditors and shareholders. Possible consequences from
     a failure of the Company to complete the Restructuring contemplated by
     the Prepackaged Plan include (i) potential substantial diminution in the
     value of the Company's assets, (ii) substantially higher costs for any
     alternative restructuring transaction, (iii) uncertainty regarding the
     amount of time needed to effectuate an alternative restructuring
     transaction, if any, (iv) interference and delay of payments to holders
     of the Outstanding Notes and other Claims, (v) disruption of the
     Company's efforts to increase its liquidity, (vi) potential forced
     liquidation of the Company's assets in distressed markets at
     substantially reduced values, and (vii) the failure of the holders of
     Outstanding Common Shares to receive anything. See "Special Factors and
     Certain Considerations--Foreclosure and Bankruptcy Alternatives."     
     
  .  Possible Further Decline of Real Estate Markets. Substantial declines in
     real estate markets over the last few years have had a material adverse
     impact on the Company. If the real estate markets decline further, the
     Company may not be able to meet its payment obligations under the New
     Senior Notes. See "Special Factors and Certain Considerations--Possible
     Further Decline of Real Estate Markets."     
     
  .  Disruption of the Company's Business. If the Restructuring is not
     consummated, it may be necessary for the Company to dispose of a
     material amount of assets in a depressed real estate market or to
     liquidate. See "Special Factors and Certain Considerations--Disruption
     of the Company's Business."     
     
  .  Considerations Relating to the Prepackaged Plan. A failure by an
     impaired class to accept the Prepackaged Plan may result in the
     "cramdown" of such class. Even if the Prepackaged Plan is accepted,
     there can be no assurances that it will be confirmed by the Bankruptcy
     Court. Should
         
                                       13
<PAGE>

        
     the Prepackaged Plan not be accepted, it may be necessary for the
     Company to file a case for reorganization under Chapter 11 or
     liquidation under Chapter 7, which may result in reduced distributions
     (or no distributions) to holders of Claims and Interests. See "Special
     Factors and Certain Considerations--Considerations Relating to the
     Prepackaged Plan."     
     
  .  Certain Bankruptcy Considerations if the Prepackaged Plan is Not
     Confirmed and the Restructuring is Not Otherwise Consummated. If the
     Prepackaged Plan is not confirmed, it may be necessary for the Company
     to be liquidated in a bankruptcy case, in which case the Claims and
     Interests would receive less than under the Prepackaged Plan, and while
     in a bankruptcy case, the Company may have insufficient operating cash.
     See "Special Factors and Certain Considerations--Certain Bankruptcy
     Considerations if the Prepackaged Plan Is Not Confirmed and the
     Restructuring is Not Otherwise Consummated."     
     
  .  Certain Consequences to Non-Voting Holders of Common Shares. If the
     Prepackaged Plan is confirmed, pursuant to the Reverse Stock Split, each
     33.33 Outstanding Common Shares will be converted into one New Common
     Share or, if the class of holders of Outstanding Common Shares rejects
     the Prepackaged Plan, the Outstanding Common Shares will be canceled, in
     each case, regardless of whether any particular holder of Outstanding
     Common Shares voted for the Prepackaged Plan. See "Special Factors and
     Certain Considerations--Certain Consequences to Non-Voting Holders of
     Common Shares."     
     
  .  Material Dilution of Common Equity. Pursuant to the Prepackaged Plan, a
     large number of New Common Shares will be issued to holders of
     Outstanding Notes, resulting in a substantial dilution of the equity
     ownership of the holders of Outstanding Common Shares. See "Special
     Factors And Certain Considerations--Material Dilution of Common Equity."
            
  .  Risks Relating to the Projections. The Company has prepared projections
     of the cash flows of its business following the Restructuring, and such
     projections are inherently imprecise, based on numerous assumptions with
     respect to industry performance, general business and economic
     conditions and other matters. Holders are cautioned not to place undue
     reliance on the projections. See "Special Factors And Certain
     Considerations--Risks Relating to the Projections."     
     
  .  Restricted Payments. The indenture governing the New Senior Notes will
     limit the Company's ability to make any dividend payment or other
     distribution of assets, properties, cash, rights, obligations or
     securities on account of or in respect of any of its Common Shares. See
     "Special Factors and Certain Considerations--Restricted Payments."     
     
  .  Absence of Public Market. There can be no assurances that an active
     trading market for the New Senior Notes will develop and no assurance
     can be given as to the prices at which such securities may trade. In
     addition, the NYSE has notified the Company that it may commence
     delisting proceedings in respect of the Common Shares. If the Common
     Shares are delisted, there can be no assurance that the Company would be
     able to make alternative listing arrangements for the Common Shares, and
     the liquidity and price of the Common Shares could be adversely
     affected. See "Special Factors and Certain Considerations--Absence of
     Public Market."     
     
  .  Releases. Pursuant to the Prepackaged Plan, holders of Claims and
     Interests may elect to release certain Claims against the Company and
     others. See "Special Factors and Certain Considerations-- Releases."
            
  .  Federal Income Tax Considerations. There can be no assurances that the
     Internal Revenue Service could not successfully take the position at
     some future time that the Company no longer qualifies for taxation as a
     REIT, in which case, the Company would be subject to federal income tax
     on its income (including capital gains). See "Special Factors and
     Certain Considerations--Federal Income Tax Considerations."     
 
                                       14
<PAGE>
 
                     
                  SUMMARY PROJECTED FINANCIAL INFORMATION     
   
  In connection with the preparation of the Prepackaged Plan, financial
projections were prepared in May 1995 by management of the Company in a manner
consistent with the special purpose valuation reports prepared by Kenneth
Leventhal and the valuations prepared by Houlihan Lokey, based on assumptions,
considered reasonable by the management of the Company. These projections are
summarized below. The projections assume that the Prepackaged Plan will be
approved and implemented in accordance with its terms. The projections below
are based on a number of assumptions, including, without limitation,
assumptions relating to industry performance, general business and economic
conditions and the assumption that excess cash flow will be used to prepay debt
and not to pay dividends except to the extent required to retain REIT status,
but were not prepared with any other specific business plan in mind. After the
Effective Date, the reorganized Board of Trustees may adopt a different policy
and business plan, and there can be no assurance that any of these assumptions
will be met. The projections are only estimates, and actual results may vary
materially from the projections. In addition, uncertainties that are inherent
in the projections increase for later years in the projection period due to the
increased difficulty associated with forecasting levels of economic activity
and corporate performance at more distant points in the future. Holders are
cautioned not to place undue reliance on the projections.     
   
  The projections were not prepared with a view towards compliance with the
published guidelines of the American Institute of Certified Public Accountants
regarding financial projections, and have not been reviewed, examined or
compiled by the Company's independent auditors or any other independent
certified public accountants or by Houlihan Lokey or Kenneth Leventhal. The
Company does not, in the ordinary course of business, prepare multi-year
projections as to future revenues or earnings. Accordingly, the Company does
not plan to update or otherwise revise the projections.     
   
  For purposes of the projections below, the effective date of the Prepackaged
Plan is assumed to occur as of September 30, 1995. The summary projections
below are subject to the more detailed presentation set forth under "Financial
Projections," and should be read together with the information contained in
"Pro Forma Financial Information," "Accounting Treatment" and "Business" and
the Company's financial statements referred to under "Additional Information
Concerning the Company."     
       
                                       15
<PAGE>
 
                    
                 UNAUDITED PROJECTED OPERATING INFORMATION     
                        
                     FISCAL YEARS ENDED SEPTEMBER 30,     
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>   
<CAPTION>
                                          1996    1997   1998    1999    2000
                                         ------- ------ ------- ------- -------
<S>                                      <C>     <C>    <C>     <C>     <C>
Income
Interest and fee income on mortgage
 loans.................................. $ 6,512 $6,517 $ 6,292 $ 5,860 $ 4,428
Net operating income from real estate
 owned..................................  21,856 23,252  24,113  24,376  25,816
Interest on short-term investments......     703    626     611     564     622
                                         ------- ------ ------- ------- -------
  Total Income..........................  29,071 30,395  31,016  30,800  30,866
                                         ------- ------ ------- ------- -------
Expenses
Interest................................  12,614 10,498   8,418   6,402   3,232
Depreciation and amortization on real
 estate owned...........................   7,892  7,997   7,805   7,971   8,309
Provision for losses....................       0      0       0       0       0
Other operating expenses................   3,200  3,000   2,900   2,800   2,700
                                         ------- ------ ------- ------- -------
  Total Expenses........................  23,706 21,495  19,123  17,173  14,241
                                         ------- ------ ------- ------- -------
Net Income.............................. $ 5,365 $8,900 $11,893 $13,627 $16,625
                                         ======= ====== ======= ======= =======
Dividend distributions.................. $     0 $    0 $ 2,368 $ 4,098 $ 7,011
                                         ======= ====== ======= ======= =======
Earnings per share (based upon
 11,226,215 shares outstanding)......... $  0.48 $ 0.79 $  1.06 $  1.21 $  1.48
</TABLE>    
                  
               UNAUDITED PROJECTED BALANCE SHEET INFORMATION     
                                
                             AT SEPTEMBER 30,     
                             (DOLLARS IN THOUSANDS)
 
<TABLE>   
<CAPTION>
                                      1996     1997     1998     1999     2000
                                    -------- -------- -------- -------- --------
<S>                                 <C>      <C>      <C>      <C>      <C>
Total Assets....................... $225,086 $216,578 $207,643 $198,259 $175,892
Total Liabilities..................  103,832   86,424   67,964   49,051   17,070
Total Shareholders' Equity.........  121,254  130,154  139,679  149,208  158,822
</TABLE>    
 
                                       16
<PAGE>
 
                     
                  SUMMARY PRO FORMA FINANCIAL INFORMATION     
   
  The following summary unaudited pro forma operating information for the year
ended September 30, 1994, and the six months ended March 31, 1995, was prepared
as if consummation of the Prepackaged Plan occurred at October 1, 1993. The
summary unaudited pro forma balance sheet information as of March 31, 1995 was
prepared as if the consummation of the Prepackaged Plan occurred as of March
31, 1995. The adjustments set forth under the caption "Proposed Reorganization"
reflect the assumed effects of the Restructuring. The adjustments set forth
under the caption "Fresh Start" reflect the assumed effects of the adoption of
the fresh start accounting prescribed by SOP 90-7 (as hereafter defined). The
summary unaudited pro forma information should be read in conjunction with the
financial statements of the Company and the related notes thereto referred to
under "Additional Information Concerning the Company" and management's
discussion thereof contained elsewhere in this Disclosure Statement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The summary unaudited pro forma information is not necessarily
indicative of what the actual financial position or results of operations would
have been at such times or for such periods, nor does it purport to represent
the future financial results of the Company. Amounts below are stated in
thousands of dollars.     
 
<TABLE>   
<CAPTION>
                          YEAR ENDED SEPTEMBER 30, 1994    SIX MONTHS ENDED MARCH 31, 1995
                          ------------------------------- ------------------------------------
                                       PRO FORMA    PRO                 PRO FORMA      PRO
PRO FORMA OPERATING       HISTORICAL  ADJUSTMENTS  FORMA  HISTORICAL   ADJUSTMENTS    FORMA
INFORMATION:              ----------  ----------- ------- -----------  ------------  ---------
                                                    (UNAUDITED)
<S>                       <C>         <C>         <C>     <C>          <C>           <C>
Total income............   $ 26,450     $   494   $25,956   $  14,304   ($   1,253)  $  13,051
                          ---------     -------   -------  ----------   ----------   ---------
Interest and operating
 expense................     37,840     (19,064)   18,776      22,030      (12,640)      9,390
Depreciation and
 amortization...........      5,840        (731)    5,109       3,486         (681)      2,805
Provision for losses....      2,000      (2,000)        0       3,000       (3,000)          0
Reorganization expenses,
 net....................      2,360      (2,360)        0       1,505       (1,505)          0
                          ---------     -------   -------  ----------   ----------   ---------
 Total expenses.........     48,040     (24,155)   23,885      30,021      (17,826)     12,195
                          ---------     -------   -------  ----------   ----------   ---------
Net income (loss).......  ($ 21,590)    $23,661   $ 2,071    ($15,717)   $  16,573      $  856
                          =========     =======   =======  ==========   ==========   =========
</TABLE>    
 
<TABLE>   
<CAPTION>
                                             AS AT MARCH 31, 1995
                                  --------------------------------------------
                                                PROPOSED     FRESH      PRO
PRO FORMA BALANCE SHEET           HISTORICAL REORGANIZATION  START     FORMA
INFORMATION:                      ---------- -------------- --------  --------
                                                  (UNAUDITED)
<S>                               <C>        <C>            <C>       <C>
Total assets.....................  $366,948    ($ 61,873)   ($68,908) $236,167
Total liabilities................   362,632     (231,324)       (315)  130,993
Shareholders' equity.............     4,316      169,451     (68,593)  105,174
</TABLE>    
 
                                       17
<PAGE>
 
                    
                 SUMMARY HISTORICAL FINANCIAL INFORMATION     
   
  The following summary financial data for the five years ended September 30,
1994 are derived from the consolidated financial statements of the Company. The
financial data for the six month periods endedMarch 31, 1995 and 1994 are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which the
Company considers necessary for fair presentation of the financial position and
the results of operations for these periods. Operating results for the six
months ended March 31, 1995 are not necessarily indicative of the results that
may be expected for the entire year ended September 30, 1995. The data should
be read in conjunction with the consolidated financial statements and the
related notes referred to in "Additional Information Concerning the Company"
and the other financial information included herein.     
 
<TABLE>   
<CAPTION>
                                                                            SIX MONTHS ENDED
                                   YEARS ENDED SEPTEMBER 30,                    MARCH 31,
                          ------------------------------------------------  ------------------
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
                            1990      1991      1992      1993      1994      1995      1994
                          --------  --------  --------  --------  --------  --------  --------
<CAPTION>
                                                                               (UNAUDITED)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA
Total income............  $ 68,233  $ 56,253  $ 42,009  $ 38,342  $ 36,277  $ 19,776  $ 17,266
Interest and operating
 expenses...............    47,601    51,736    42,077    43,967    47,668    27,502    22,824
Depreciation and amorti-
 zation.................     2,391     3,062     4,470     5,500     5,839     3,486     2,833
Income (loss) before
 provision for losses,
 reorganization expenses
 and gain on sales
 of real estate.........    18,241     1,455    (4,538)  (11,125)  (17,230)  (11,212)   (8,391)
Provision for losses....    23,790    33,000    32,000    37,000     2,000     3,000        --
Reorganization expenses,
 net....................     5,051     4,352       934     5,844     2,360     1,505     1,417
Gain on sales of real
 estate.................       244       244        --        --        --        --        --
Net income (loss).......   (10,356)  (35,653)  (37,472)  (53,969)  (21,590)  (15,717)   (9,808)
PER SHARE DATA
Net loss................  ($   .94) ($  3.22) ($  3.38) ($  4.87) ($  1.92) ($  1.40) ($   .87)
Dividends declared (1)..       .45       -0-       -0-       -0-       -0-       -0-       -0-
Book value..............     15.23     12.01      8.63      3.71      1.79       .38      2.83
BALANCE SHEET DATA
Total assets............  $595,640  $514,754  $427,268  $353,874  $364,244  $366,948  $359,465
Invested assets.........   547,480   505,600   424,394   347,526   309,477   298,449   327,546
Allowance for losses....    10,792    14,707    19,353    11,808    13,430    11,031    11,050
Creditor Obligations....   403,884   374,000   312,000   290,000   290,000   290,000   290,000
Loans on equity invest-
 ment...................        --        --    15,515    17,572    17,593    17,593    17,593
Shareholders' equity....   168,717   133,064    95,592    41,623    20,033     4,316    31,815
</TABLE>    
- --------
(1)Dividends shown are those attributable to earnings for the period indicated.
 
                                       18
<PAGE>
 
 
                    CERTAIN FEDERAL INCOME TAX CONSEQUENCES
   
  Tax Consequences to Creditors. Creditors whose Claims are not classified as a
security for federal income tax purposes (a "Tax Security") will recognize
taxable gain or loss on the exchange of such a Claim for cash or property. The
Company expects the Prepackaged Plan to qualify as a "tax-free
recapitalization," in which case holders of Tax Securities who receive New
Common Shares, New Senior Notes, or both, will generally not recognize taxable
gain or loss, subject to certain exceptions. Gain or loss recognized by a
holder of a Claim may be capital or ordinary in character, depending on various
factors, including each holder's individual circumstances. Payments made to
qualifying creditors may be subject to backup withholding and such creditors
may be required to provide general tax information to the Company. See "Certain
Federal Income Tax Consequences--Tax Consequences to Creditors."     
   
  REIT Status and Company Taxation. The Company will continue to elect to be
taxed as a REIT under the Internal Revenue Code, and the Company intends to
continue to operate in such a manner as to continue to qualify for taxation as
a REIT under the relevant sections of the Internal Revenue Code. As long as the
Company continues to qualify to be taxed as a REIT, it generally will not be
subject to federal corporate income taxes on the portion of its ordinary income
or capital gain that is distributed on a current basis to its shareholders. See
"Certain Federal Income Tax Consequences--REIT Status and Taxation of Company
Under the Prepackaged Plan."     
   
  Additional Tax Consequences to the Company from the Prepackaged Plan. The
Company's federal income tax returns reflect significant net operating loss
carryovers. The Company's future use of those net operating loss carryovers
will be limited by the application of Internal Revenue Code section 382,
because the Prepackaged Plan will cause the Company to undergo an "ownership
change." Subject to the above described limitations, the Company may generally
elect to use its net operating loss carryover to reduce its REIT taxable
income. The Company's use of its net operating loss carryovers to shelter its
alternative minimum taxable income may be subject to separate limitations.     
   
  As a result of the Prepackaged Plan, the Company's aggregate outstanding
indebtedness will be reduced, causing the Company to realize cancellation of
indebtedness income. The Company will be required to reduce its tax attributes,
including its net operating loss carryovers, by the amount of the cancellation
of indebtedness income, although it will not be required to include such income
in its taxable income. See "Certain Federal Income Tax Consequences--Additional
Tax Consequences to the Company from the Prepackaged Plan."     
   
  For a more complete discussion of certain United States federal income tax
consequences of consummation of the transactions contemplated by the
Prepackaged Plan to holders and the Company, see "Certain Federal Income Tax
Consequences."     
 
                                       19
<PAGE>
 
                   SPECIAL FACTORS AND CERTAIN CONSIDERATIONS
   
  Holders should consider the factors set forth below, as well as the other
information set forth in this Disclosure Statement, prior to determining
whether to accept or reject the Prepackaged Plan.     
 
FINANCIAL CONDITION OF THE COMPANY; LIQUIDITY
   
  The aggregate amount, including accrued but unpaid interest, owing on the
Outstanding Notes as of May 31, 1995 is $322.9 million. Notwithstanding the
uncured events of default under the Outstanding Note Indenture (as hereinafter
defined), see "The Prepackaged Plan--Background of the Restructuring--Current
Defaults," the Outstanding Notes have not been accelerated. As of May 31, 1995,
the available cash of the Company was approximately $46.5 million.
Consequently, the Company cannot pay amounts outstanding on the Outstanding
Notes and anticipates that it will not receive sufficient cash from its
operations or from the dispositions of assets to make the interest and
principal payments scheduled for fiscal 1995 under the Outstanding Notes.
Pursuant to the Restructuring, the Company does not anticipate making such
principal or interest payments. Although the Outstanding Notes have not been
accelerated, the holders of such notes or the Outstanding Note Trustee (as
hereinafter defined) may determine at any time to accelerate such notes and
exercise their rights and remedies, including the right to foreclose on the
collateral, consisting of all of the assets of the Company, granted to them
under the Outstanding Note Indenture and the Outstanding Collateral Agreement,
based upon the existing events of default or otherwise. See "--Foreclosure and
Bankruptcy Alternatives" and "--Possible Further Decline of Real Estate
Markets" below.     
 
CONTINUING LEVERAGE
 
  The Company is now highly leveraged and, although completion of the
Restructuring will significantly reduce the Company's debt obligations, the
Company will still have a substantial amount of debt after the Restructuring.
See "Pro Forma Financial Information--Pro Forma Balance Sheet."
   
  The Company believes that, after giving effect to the Restructuring, the
Company's cash flow from operations and cash on hand will be adequate to make
the required payments of principal and interest on its debt, to make
anticipated capital expenditures and to fund working capital requirements. See
"Financial Projections." If the Company is unable, however, to generate
sufficient cash flow from operations in the future, or if it fails to satisfy
the financial tests under the New Senior Note Indenture (as hereinafter
defined), it could face default on its restructured obligations.     
   
  The leveraged nature of the Company's capital structure will have several
important effects on the Company and its operations, including the following:
(i) the Company will continue to have significant cash requirements for debt
service; (ii) the covenants and other restrictions contained in the New Senior
Note Indenture governing the New Senior Notes will limit the Company's ability
to borrow additional funds; (iii) as a result of the Company's debt service
requirements and restrictions on the incurrence of indebtedness imposed under
the terms of the New Senior Note Indenture, funds available for capital
expenditures may be limited; and (iv) the Company's ability to meet its debt
service obligations and to reduce its total debt will be dependent upon its
future performance, which, in turn, will be subject to general economic
conditions and to financial, business and other factors affecting its
operations and the real estate market, including many factors beyond its
control.     
 
FORECLOSURE AND BANKRUPTCY ALTERNATIVES
 
  As stated above, if the Restructuring is not effected, the Company will
continue to be in default under the Outstanding Note Indenture. The Company
does not anticipate that it will be able to address such default other than as
contemplated by the Restructuring or through a nonconsensual bankruptcy filing.
The holders of Outstanding Notes have certain rights and remedies, including
the right to foreclose on the collateral
 
                                       20
<PAGE>
 
   
granted in connection with the Prior Plan (as hereinafter defined) and the
Outstanding Collateral Agreement (as hereinafter defined). This collateral
constitutes all or substantially all of the Company's assets. If the Company
does not receive the Requisite Plan Acceptances, it is likely that the Company
will nonetheless be forced to file for reorganization under Chapter 11 of the
Bankruptcy Code for the second time to avoid such foreclosure. The Company's
range of enterprise going concern value and range of liquidation value are
substantially less than the Company's current liabilities. As a result, there
may be no way to avoid liquidation of some or all of the Company's assets and
it is unlikely that the holders of Outstanding Notes and other Claims would
receive payment in full on their obligations. In any case, it is unlikely that
holders of Outstanding Common Shares would receive or retain anything in a
foreclosure or non-prepackaged bankruptcy. The Company believes that any
bankruptcy case, other than the bankruptcy case contemplated pursuant to the
Prepackaged Plan, would have a material adverse effect on the Company, and its
creditors and shareholders, including (i) potential substantial diminution in
the value of the Company's assets, (ii) substantially higher costs of any
alternative restructuring transaction, (iii) uncertainty regarding the amount
of time needed to effectuate an alternative restructuring transaction, if any,
(iv) interference and delay of payments to holders of the Outstanding Notes and
other Claims, (v) disruption of the Company's efforts to increase its
liquidity, and (vi) potential forced liquidation of the Company's assets in
distressed markets at substantially reduced values, with a resulting loss to
creditors and others. In such a case, the Company believes that holders of
Outstanding Common Shares are unlikely to receive anything from the Company or
its assets.     
 
POSSIBLE FURTHER DECLINE OF REAL ESTATE MARKETS
 
Recent volatility in the United States and foreign financial markets, as well
as financial distress encountered by numerous real estate companies, has had an
adverse effect on the value of real estate, including that owned by the
Company. In addition, disruption in the market for "high yield" debt
securities, continued focus by financial institution regulators on "highly
leveraged transactions" and a general reduction in the availability of other
sources of funding have negatively impacted real estate values. Notwithstanding
management's efforts to reduce the Company's non-performing assets and to
generate cash from dispositions of selected assets at favorable prices since
the effective date of the 1991 Plan, the real estate markets have unexpectedly
continued to decline and the current liquidation value of the Company's
portfolio has continued to decrease. This situation is exacerbated as other
participants in the commercial real estate market experience financial
difficulty, increasing the prospect of additional excess supply of real estate
for sale, often through "fire-sale" liquidations. For example, the following
shows, as of the dates indicated, the amount (in thousands) at book value of
non-earning loans (including in-substance foreclosures) and non-earning
properties acquired through foreclosure and held for sale, and the non-earning
loans and non-earning properties as a percentage of the Company's invested
assets:
 
<TABLE>   
<CAPTION>
                                                  NON-EARNING LOANS AND PROPERTY
                                                     AS A PERCENT OF INVESTED
PERIOD ENDED                          AMOUNT                  ASSETS
- ------------                       -------------- ------------------------------
                                   (IN THOUSANDS)
<S>                                <C>            <C>
March 31, 1995....................    $52,460                  17.6%
December 31, 1994.................     47,008                  15.2
September 30, 1994................     42,480                  13.7
June 30, 1994.....................     40,539                  13.1
March 31, 1994....................     44,909                  13.7
December 31, 1993.................     41,822                  12.3
September 30, 1993................     58,804                  16.9
June 30, 1993.....................     32,180                   8.5
March 31, 1993....................     29,562                   7.5
December 31, 1992.................     30,278                   7.5
September 30, 1992................     58,348                  13.8
June 30, 1992.....................     50,218                  11.2
</TABLE>    
 
                                       21
<PAGE>
 
   
  The Company's current projections assume that the overcapacity and
illiquidity in the real estate markets will continue through 1995 with gradual
improvements in 1996 and thereafter. See "Financial Projections."
Notwithstanding the conclusion that the Restructuring as effected through the
Prepackaged Plan is feasible, there can be no assurance that, even if the
Restructuring is successful, payments in respect of the New Senior Notes can be
made if the deterioration in the real estate market accelerates or continues
longer than expected. ALTHOUGH THE COMPANY HAS ATTEMPTED TO PROJECT ACCURATELY
ITS FUTURE CASH FLOWS (SUBJECT TO THE LIMITATIONS SET FORTH UNDER "FINANCIAL
PROJECTIONS"), THERE IS A RISK THAT THE COMPANY MAY NOT BE ABLE TO MEET THE
REPAYMENT TERMS OF THE NEW SENIOR NOTES OR PAY ANY DIVIDENDS ON THE COMMON
SHARES. ADVERSE CONDITIONS, SUCH AS A FURTHER DOWNTURN IN THE REAL ESTATE
MARKETS OR A "CREDIT CRUNCH" IN THE COMMERCIAL REAL ESTATE INDUSTRY OR
OTHERWISE, ARE BEYOND THE ABILITY OF THE COMPANY, OR ANY OTHER ENTITY, TO
PREDICT WITH ANY CERTAINTY AND MAY IMPACT THE COMPANY'S ABILITY TO REPAY THE
NEW SENIOR NOTES AND TO PAY DIVIDENDS ON THE COMMON SHARES.     
 
DISRUPTION OF THE COMPANY'S BUSINESS
   
  If the Restructuring is not consummated, it may be necessary for the Company
to dispose of a material amount of assets. There can be no assurance that the
Company can complete asset dispositions that will generate sufficient cash to
repay the Outstanding Notes. The Company's ability to realize acceptable values
on a short-term basis is severely limited by current market conditions,
including the lack of available capital to prospective purchasers. More likely,
if the Restructuring is not consummated, the Company would be liquidated and
consequently, holders of Claims may not receive cash or securities of the same
value and having as favorable terms as under the Prepackaged Plan, and holders
of Outstanding Common Shares most likely would not receive or retain anything.
    
CONSIDERATIONS RELATING TO THE PREPACKAGED PLAN
          
  Risks Associated with Rejection of the Prepackaged Plan. Should the Company
not receive sufficient acceptances to seek confirmation of the Prepackaged Plan
by the Bankruptcy Court, the Company would be forced to seek alternative means
of restructuring. The Company may be required to file a voluntary Chapter 11
petition for which a new plan of reorganization would need to be negotiated. As
compared to the Prepackaged Plan, a non-prepackaged Chapter 11 case would
likely be lengthier and result in significantly increased administrative
expenses, a negative impact on cash flow and a corresponding reduction in the
consideration received by holders of Claims and Interests.     
   
  If a new plan of reorganization could not be confirmed within a reasonable
amount of time, the Company might be forced into a liquidation under Chapter 7
of the Bankruptcy Code. In a Chapter 7 liquidation, based upon Kenneth
Leventhal's estimate of liquidation value, the Company believes that (i)
holders of Outstanding Notes would receive approximately 66.5%-75.8% of the
value such holders would receive under the Prepackaged Plan and (ii) holders of
Outstanding Common Shares would likely not receive any distribution. See "The
Prepackaged Plan -- Confirmation of the Prepackaged Plan -- Chapter 7
Liquidation Analysis."     
          
  Disruption of the Company's Business. The Company presently intends to
commence the Reorganization Case in connection with the Prepackaged Plan.
Although the Company anticipates that the Prepackaged Plan will shorten the
period during which the Company must operate under Chapter 11, the Prepackaged
Plan will still necessitate a bankruptcy filing and may not permit the Company
to avoid some of the disruptions to the Company's business specified above. See
"--Foreclosure and Bankruptcy Alternatives" above.     
          
  Risk of Non-Confirmation of the Prepackaged Plan. Even if all classes of
Claims and Interests accept or are deemed to have accepted the Prepackaged
Plan, the Prepackaged Plan may not be confirmed by the Bankruptcy Court.
Section 1129 of the Bankruptcy Code requires, among other things, that
confirmation of the Prepackaged Plan not be followed by a need for liquidation
or further financial reorganization of the debtor (the "Feasibility Test").
Furthermore, the value of distributions to dissenting creditors and equity     
 
                                       22
<PAGE>
 
   
security holders may not be less than the value of distributions such creditors
and shareholders would receive if the Company were liquidated under Chapter 7
of the Bankruptcy Code (the "Best Interests Test"). See "The Prepackaged Plan--
Confirmation of the Prepackaged Plan." Although the Company believes that the
Prepackaged Plan will meet such tests, there can be no assurance that the
Bankruptcy Court will reach the same conclusion.     
   
  Additionally, this Solicitation for acceptances of the Prepackaged Plan must
comply with the requirements of section 1126(b) of the Bankruptcy Code. In
order to confirm the Prepackaged Plan, the Bankruptcy Court must determine that
it was solicited in compliance with applicable non-bankruptcy law governing the
adequacy of disclosure in connection with such Solicitation, including
compliance with the federal securities laws. If the Bankruptcy Court were to
find that this Solicitation was not in such compliance, acceptances received
under the Solicitation could be invalidated. In such an event, the Company may
be required to resolicit acceptances, and confirmation of the Prepackaged Plan
could be delayed and possibly jeopardized. The Company believes that its
Solicitation of acceptances of the Prepackaged Plan complies with the
requirements of section 1126(b) of the Bankruptcy Code, that duly executed
Ballots and Master Ballots will be in compliance with applicable provisions of
the Bankruptcy Code, and that the Prepackaged Plan should be confirmed by the
Bankruptcy Court, if the Requisite Plan Acceptances are received.     
   
  There can be no assurance, however, that the Requisite Plan Acceptances will
be received or that the Prepackaged Plan will ever be filed. Additionally, if
the Prepackaged Plan is filed, there can be no assurance that modifications
thereof will not be required for confirmation, or that such modifications would
not result in a resolicitation of acceptances. Subject to the consent of the
Principal Holders, the Prepackaged Plan may be modified without resolicitation
if the Bankruptcy Court finds, after proper notice to affected creditors or
other affected entities and a hearing, that such modifications do not adversely
affect the treatment of any Holder who has not accepted the modification in
writing.     
          
  Nonconsensual Confirmation. If an impaired class does not vote to accept the
Prepackaged Plan, the Bankruptcy Court may nonetheless confirm the Prepackaged
Plan under the "cramdown" provisions of section 1129(b) of the Bankruptcy Code.
In order to confirm the Prepackaged Plan using "cramdown" procedures, the
Bankruptcy Court must determine that, in addition to satisfying all other
requirements for confirmation, the Prepackaged Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to each impaired class that
has not accepted the Prepackaged Plan and with respect to Class 6. If
necessary, the Company intends to use "cramdown" procedures with respect to all
non-accepting impaired classes, other than holders of Outstanding Notes. See
"The Prepackaged Plan--Confirmation of the Prepackaged Plan--Nonconsensual
Confirmation." The Company reserves the right to request nonconsensual
confirmation of the Prepackaged Plan in the event any impaired class, other
than the class of holders of Outstanding Notes, fails to vote to accept the
Prepackaged Plan.     
 
CERTAIN BANKRUPTCY CONSIDERATIONS IF THE PREPACKAGED PLAN IS NOT CONFIRMED AND
THE RESTRUCTURING IS NOT OTHERWISE CONSUMMATED
 
  In addition to the material risks associated with any bankruptcy case and as
discussed above in connection with the Prepackaged Plan, there may be
additional risks to the Company and the holders of Claims and Interests if the
Prepackaged Plan is not confirmed.
          
  Possible Liquidation. If the Prepackaged Plan is not confirmed and the
Restructuring is not otherwise consummated, it is unclear what distributions
the holders of Claims and Interests would receive in respect of their Claims or
Interests. If an alternative reorganization could not be agreed to or confirmed
through the use of "cramdown" procedures, it is possible that the Company would
have to liquidate its assets under either Chapter 11 or Chapter 7 of the
Bankruptcy Code, or that the holders of the Outstanding Notes may be allowed to
foreclose their liens, in which cases the Company believes that holders of
Claims and Interests would receive less than they would pursuant to the
Prepackaged Plan. See "The Prepackaged Plan--Confirmation of the Prepackaged
Plan--Best Interest of Creditors Test; Liquidation Value."     
 
                                       23
<PAGE>
 
          
  Lack of Operating Cash. All assets, including all cash (other than cash
contained in the Company's termination pay plan), of the Company are subject to
the liens granted to the holders of Outstanding Notes. There can be no
assurance that if the Company were to commence a bankruptcy case it would be
able to use such cash or cash proceeds of other assets of the Company to
operate during the pendency of such bankruptcy case. The Company would only be
able to use cash if it obtains a cash collateral stipulation from the holders
of the Outstanding Notes or if the Company obtains an order of the Bankruptcy
Court. The Company does not currently have any arrangement with the holders of
the Outstanding Notes regarding the use of cash collateral in any bankruptcy
case, other than a case commenced in connection with the Prepackaged Plan, and
there can be no assurance that the Company would be able to obtain such a
stipulation or court order. If the Company is forced to seek a Bankruptcy Court
order authorizing the use of cash collateral, it would require, among other
things, litigation regarding valuation of the Company's assets and the
provision for adequate protection for the Outstanding Notes holders' interest
in the collateral securing the Outstanding Notes. Failure to obtain a cash
collateral agreement or court order permitting the use of cash collateral may
result in a liquidation of the Company.     
 
CERTAIN CONSEQUENCES TO NON-VOTING HOLDERS OF COMMON SHARES
   
  If the Prepackaged Plan is confirmed, pursuant to the Reverse Stock Split,
each 33.33 Outstanding Common Shares will be converted into one New Common
Share or, if the class of holders of Outstanding Common Shares rejects the
Prepackaged Plan, the Outstanding Common Shares will be canceled, in each case,
regardless of whether any particular holder of Outstanding Common Shares voted
for the Prepackaged Plan. The effectiveness of the Reverse Stock Split will be
conditioned, among other things, upon effectiveness of the Prepackaged Plan. On
the Effective Date, the Company will file the Amended and Restated Declaration
of Trust effecting certain changes to the Company's current Declaration of
Trust of the Company as amended through February 17, 1993 (the "Declaration of
Trust"), including the Reverse Stock Split, with the State Department of
Assessments and Taxation of Maryland.     
 
MATERIAL DILUTION OF COMMON EQUITY
   
  Pursuant to the Prepackaged Plan, a large number of New Common Shares will be
issued to holders of Outstanding Notes. Such issuance will result in a
substantial dilution of the equity ownership of the holders of Outstanding
Common Shares. Assuming the class of holders of Outstanding Common Shares votes
to accept the Prepackaged Plan, the equity ownership of such holders will be
reduced from 100% to 3% after the Restructuring. If the class of holders of
Outstanding Common Shares does not vote to accept the Prepackaged Plan, all
Outstanding Common Shares will be canceled and holders of Outstanding Common
Shares will not receive or retain anything.     
 
RISKS RELATING TO THE PROJECTIONS
   
  The Company has prepared projections of the cash flows of its business
following the Restructuring. The Projections (as hereinafter defined) were
based on numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, such as interest rates,
building occupancy and overall real estate prices and conditions, that are
beyond the Company's control. The Projections are only estimates, and actual
results may vary materially from the Projections. In addition, uncertainties
that are inherent in the Projections increase for later years in the projection
period due to the increased difficulty associated with forecasting levels of
economic activity and corporate performance at more distant points in the
future. Holders are cautioned not to place undue reliance on the projections.
See "Financial Projections."     
   
RESTRICTED PAYMENTS     
   
  The indenture governing the New Senior Notes will limit the Company's ability
to declare or make any dividend payment or other distribution of assets,
properties, cash, rights, obligations or securities on account of or in respect
of any of its Common Shares or any preferred stock which may be issued by the
Company,     
 
                                       24
<PAGE>
 
   
other than such declaration and making of dividend payments that the Company
deems necessary to preserve its status as a REIT, unless the Consolidated Net
Worth (as hereinafter defined) of the Company at the time of such payment and
after giving effect thereto is at least $50 million; provided, however, that
the Company shall in no event declare or make any such dividend payment or
other distribution if a Default or Event of Default (collectively, as defined
under the New Senior Note Indenture) has occurred and is continuing under the
New Senior Note Indenture or purchase, redeem or otherwise acquire for value
its Common Shares or any preferred stock of the Company, whether outstanding on
the Effective Date or thereafter issued and outstanding, unless the
Consolidated Net Worth of the Company at the time of such purchase, redemption
or other acquisition and after giving effect thereto is at least $50 million;
provided, however, that the Company shall in no event make any such purchase,
redemption or other acquisition if a Default or Event of Default has occurred
and is continuing. See "Description of New Senior Notes." To maintain the
Company's REIT status under the Internal Revenue Code, the Company is required
to distribute at least 95% of the Company's real estate investment trust
taxable income, and certain other categories of income. However, the Company
currently has substantial net operating loss carryforwards that will reduce the
amount of distributions required under the Internal Revenue Code, to the extent
available after giving effect to the limitations of section 382 of the Internal
Revenue Code and the other effects of the Restructuring. See "Certain Federal
Income Tax Consequences--REIT Status and Taxation of Company Under the
Prepackaged Plan--Annual REIT Distribution Requirements."     
 
ABSENCE OF PUBLIC MARKET
   
  There is no existing market for the New Senior Notes and the Company cannot
determine the value of these securities. The New Senior Notes will not be
listed on any national or regional exchange. No appraisal or independent
valuation of such securities has been sought. Consequently, there can be no
assurance that an active trading market for these securities will develop and
no assurance can be given as to the prices at which such securities might
trade. In particular, there can be no assurance that the market price for the
New Senior Notes will be at or near the face amount of the New Senior Notes.
The market for "high yield" securities, such as the New Senior Notes, has been
volatile and unpredictable, which has had an adverse effect on the liquidity
and prices for such securities.     
   
  The Outstanding Common Shares are currently listed and traded on the NYSE and
the PSE. In a letter dated November 29, 1994, the NYSE notified the Company
that in light of the Company's present financial condition as well as its
intention to file a prepackaged plan of reorganization under Chapter 11 of the
Bankruptcy Code, the NYSE is reviewing the continued listing of the Company.
Although the Company is working with representatives of the NYSE to allow the
Company to continue to be listed, there can be no assurance that the NYSE will
not determine to commence a formal delisting action. If the Common Shares are
delisted, the liquidity of the Common Shares and the price at which they may be
resold would be adversely affected and there can be no assurance that the
Common Shares will be eligible for listing on any other national or regional
exchange or quotation on any market system.     
 
RELEASES
   
  The Restructuring provides for the release of (i) certain claims which the
Company may have against the Creditors' Committee, holders of Claims or
Interests and their respective officers, directors, employees, members and
professionals, and (ii) certain Claims which the Company and holders of Claims
and Interests may have against the Company, the Creditors' Committee, the
Principal Holders and any of their respective officers, directors, members and
professionals. The Restructuring further provides that, to the extent that a
holder of a Claim or Interest elects not to grant such a release and receive a
release, such holder may elect to opt out of such releases in the space
provided for such election on the Ballot for accepting or rejecting the
Prepackaged Plan. See "The Prepackaged Plan--Summary of Other Provisions of the
Prepackaged Plan--Releases."     
 
                                       25
<PAGE>
 
FEDERAL INCOME TAX CONSIDERATIONS
   
  The Company will continue to elect to be taxed as a REIT under the Internal
Revenue Code, and the Company intends to continue to operate in such a manner
as to continue to qualify for taxation as a REIT under the relevant sections of
the Internal Revenue Code following the consummation of the Prepackaged Plan.
There can be no assurance, however, that the Internal Revenue Service could not
successfully take the position at some future time that the Company no longer
qualifies for taxation as a REIT. As long as the Company continues to qualify
to be taxed as a REIT, it generally will not be subject to federal corporate
income taxes on the portion of its ordinary income or capital gain that is
currently distributed to its shareholders. In the event the Company were to no
longer qualify for REIT taxation, it would be subject to federal income tax on
its income (including capital gains).     
   
  As a result of the Prepackaged Plan, the Company's aggregate outstanding
indebtedness will be reduced, causing the Company to realize cancellation of
indebtedness ("COD") income. The Company will not be required to include such
COD income in its taxable income because the COD income will be realized
pursuant to the Prepackaged Plan. Instead, the Company will be required to
reduce its tax attributes, including its net operating loss carryovers, by the
amount of the COD income realized pursuant to the Prepackaged Plan. The
Company's federal income tax returns reflect significant net operating loss
carryovers; those net operating loss carryovers will be reduced, as discussed
above, by the Company's COD income. The Company's future use of its remaining
net operating loss carryovers also will be limited by the application of
Internal Revenue Code section 382 because the Prepackaged Plan will cause the
Company to undergo an "ownership change." Subject to the Internal Revenue Code
section 382 limitations, the Company may generally elect to use its net
operating loss carryovers to reduce its REIT taxable income, thereby reducing
the amount of its required dividend distributions to the Company's
shareholders.     
   
  See "Certain Federal Income Tax Consequences" for a more complete discussion
of certain federal income tax consequences pursuant to the Prepackaged Plan.
    
                                       26
<PAGE>
 
                              THE PREPACKAGED PLAN
   
  A copy of the Prepackaged Plan is included in this Disclosure Statement as
Annex A. The following summary of the material provisions of the Prepackaged
Plan is qualified in its entirety by reference to all of the provisions of the
Prepackaged Plan, including the definitions therein of certain terms used
below.     
   
BACKGROUND OF THE RESTRUCTURING     
   
  Previous Chapter 11 Reorganization. On April 12, 1990, the Company filed a
voluntary petition for reorganization under Chapter 11 in the Bankruptcy Court.
Following the Chapter 11 filing, the United States Trustee appointed the
Creditors' Committee and the Equity Committee. On November 21, 1990, the 1991
Plan proposed by the Company, the Creditors' Committee and the Equity Committee
was filed with the Bankruptcy Court. The 1991 Plan was confirmed by the
Bankruptcy Court on February 27, 1991.     
   
  The 1991 Plan provided that the holders of the Company's outstanding debt
would receive installment payments through June 30, 1995, subject to the right
of the Company to defer payment of certain amounts for up to 24 months or until
December 31, 1995, when all deferred payments would be due. Interest was
payable initially at the reference rate of Bank of America plus one percent,
increasing by 0.25% every six months, with interest on deferred amounts
accruing at the adjusted rate plus two percent. The 1991 Plan also included
certain financial, affirmative and negative covenants.     
   
  The forecast on which the 1991 Plan was based assumed that real estate
markets would begin to improve in fiscal 1992. However, the markets continued
to deteriorate significantly and the Company was in danger of imminent default.
Despite these conditions, the Company was able to make all required interest
payments and to exceed the required amortization payments, reducing its debt to
$329 million by January 3, 1992, primarily by liquidating Company assets at
substantial discounts from their acquisition cost. Due to the continued
deterioration of real estate markets, however, the Company could not meet a
required amortization payment on June 30, 1992, which required the Company to
reduce its debt to $291,250,000, taking into account deferrals permitted under
the 1991 Plan. The Company was also unable to meet the financial covenants of
the 1991 Plan.     
   
  By 1992, the Company had redirected its focus to adjust its operations to
then-prevailing market conditions. Management focused efforts on generating
sufficient liquidity through active, asset-specific management of the Company's
asset portfolio to meet payments required by the 1991 Plan, while at the same
time attempting to maximize shareholder value. The Company also attempted to
raise cash through structured financings such as asset securitizations, but was
unable to complete a financing transaction. Despite such efforts, 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 Company elected to
defer a portion of the principal payment and limit future interest payments in
the hope that United States real estate markets would improve sufficiently to
enable the Company to meet its debt service requirements. This was accomplished
by the 1992 Restructuring. See "--The 1992 Restructuring" below.     
   
  The 1992 Restructuring. Commencing in the first quarter of fiscal 1992, the
Company and the Creditors' Committee discussed a rescheduling of the Company's
debt obligations under the 1991 Plan. Through the third quarter of fiscal 1992,
the Company negotiated with the Creditors' Committee to develop a prudent
rescheduling of such debt. On June 15, 1992, the Company commenced a
Solicitation of acceptances to certain modifications (the "1992 Modifications")
to the debt obligations of the Company. On July 15, 1992, the Company completed
the 1992 Restructuring.     
   
  Pursuant to the 1992 Restructuring, the outstanding debt was restructured
through the issuance of the Outstanding Notes. The 1992 Restructuring, among
other things, (i) increased the amount of principal that could be deferred
(while retaining the final payment date due for deferred payments at December
31, 1995),     
 
                                       27
<PAGE>
 
   
(ii) extended the permitted repayment period of such deferred amounts from 24
months to 30 months from the date a deferral is utilized, (iii) established 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 interest being accrued and paid at
December 31, 1995, (iv) changed certain required financial covenants to reflect
the then-existing financial condition of the Company and then-existing real
estate market conditions, (v) provided for the release of collateral for
certain financings by the Company upon approval of the holders of 66 2/3% of
the Outstanding Notes, and (vi) provided for the payment of additional
consideration to the holders of the Outstanding Notes equal to one percent of
the principal amount of the Outstanding Notes, payable in four semi-annual
installments commencing on the date the 1992 Restructuring became effective.
    
          
  Pursuant to the 1992 Restructuring, the Company (i) entered into an indenture
providing for the issuance of the Outstanding Notes (the "Outstanding Note
Indenture") with Wilmington Trust Company, as trustee (the "Outstanding Note
Trustee"), (ii) entered into a second amendment to the Collateral and Security
Agreement dated as of February 21, 1991 (as amended, the "Outstanding
Collateral Agreement"), and (iii) amended the 1991 Plan (as amended pursuant to
the 1992 Restructuring, the "Prior Plan").     
   
  The Outstanding Notes. The aggregate principal amount of the Outstanding
Notes is $290 million. The Outstanding Notes provide for 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 Company has the right to defer certain
principal payments for up to 30 months, until December 31, 1995, at which time
all deferred amounts are due. The Outstanding Notes provide for interest
payments on March 31, June 30, September 30 and December 31 of each year. The
interest rate on the Outstanding Notes is determined on the same basis as under
the 1991 Plan. The current rate on the Outstanding Notes is the reference rate
plus 4.0% (13.0%) increasing to the reference rate plus 4.25% on July 1, 1995,
(the "Adjusted Rate"). Interest on deferred principal is payable at the
Adjusted Rate plus two percent. The Outstanding Note Indenture also contains
certain financial, affirmative and negative covenants. For a description of the
Outstanding Notes, see "Description of Outstanding Notes."     
   
  Current Defaults. The financial projections on which the 1992 Restructuring
was based assumed that the real estate markets would stop or slow their decline
by 1993 and show some improvement in 1994. Instead, since the effective date of
the 1992 Restructuring, the real estate markets have failed to improve in any
significant way. The Company's business operations, including its ongoing
efforts to refinance and sell property, have not generated cash flow sufficient
to service the Outstanding Notes during the fiscal years ended September 30,
1993 and 1994. Because its operating income had declined due to the continued
deterioration of the real estate markets, the Company was not able to make a
required $20 million principal payment on June 30, 1993. The Company's failure
to make that payment constituted an event of default under the Outstanding Note
Indenture. In addition, the Company failed to meet certain ratios set forth in
the financial covenants in the Outstanding Note Indenture as of March 31, June
30 and September 30, 1993, which constituted additional events of default.     
   
  Beginning with the payments due on December 31, 1993, the Company suspended
all payments due in respect of the Outstanding Notes. By March 31, 1995, the
Company had defaulted in the payment of $152.6 million of principal and $51.3
million in interest. The Company currently has no agreement with any holders of
Outstanding Notes that suspend its obligations to pay interest, principal or
other amounts due in respect of the Outstanding Notes. Because the Company did
not make the required payments during the period from June 30, 1993 through
March 31, 1995, as of March 31, 1995, the Company held approximately $70.7
million in available cash. Pursuant to the Agreement of Understanding, on April
11, 1995, the Company paid $25.0 million in accrued interest on the Outstanding
Notes, with such payment to be credited against the cash payment of at least
$50 million to be made to the holders of the Outstanding Notes pursuant to the
Prepackaged Plan. The Company does not currently plan to make any further
principal or interest payments in respect of the Outstanding Notes prior to the
Effective Date.     
   
  Notwithstanding the uncured events of default under the Outstanding Note
Indenture, the Outstanding Notes have not been accelerated. On July 2, 1993,
holders of approximately 81% of the Outstanding Notes
    
                                       28
<PAGE>
 
          
agreed not to accelerate the Outstanding Notes during a defined standstill
period (the "Standstill Period") initially expiring July 31, 1993. The
Standstill Period was extended on August 3, August 20, September 23, October 5
and November 23, 1993. On December 3, 1993, the Standstill Period expired. On
or about December 8, 1993, the Outstanding Note Trustee and the collateral
agent under the Outstanding Collateral Agreement (the "Outstanding Collateral
Agent") notified the Company's bank of the existence of the Outstanding Note
Trustee's security interest in the Company's deposit accounts and instructed
the bank to freeze the Company's cash until otherwise instructed by the
Outstanding Note Trustee. Since that date, the Company has administered its
cash on an ad hoc basis, with all use of cash subject to review and approval by
the Outstanding Note Trustee. On or about February 3, 1994, the Company, the
Outstanding Note Trustee and the Outstanding Collateral Agent reached a further
understanding regarding the Company'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 Outstanding Note Trustee or
the Outstanding Collateral Agent without the consent of the holders of the
Outstanding Notes, the Company has been permitted to continue to use its cash
on an ad hoc basis, subject to Outstanding Note Trustee and Outstanding
Collateral Agent approval, and to administer its assets as if no default had
occurred and was continuing.     
   
  In May 1994, the Company's bank notified the Company that it intended to
close all of the Company's operating accounts with the bank on May 31, 1994.
Consequently, the Company established new operating accounts at Wilmington
Trust Company and transferred all of its bank balances to such accounts.
Concurrently, the Company and the Outstanding Note Trustee entered into a First
Supplemental Indenture, dated as of May 25, 1994, amending the Outstanding Note
Indenture to provide for the new accounts. The Company also entered into a
Deposit Account Security Agreement relating to such accounts and supplemented
the February operating arrangement with the Outstanding Note Trustee and the
Outstanding Collateral Agent to provide for the new accounts. Although the
Company has entered into the First Supplemental Indenture and amended its
operating arrangement with the Outstanding Note Trustee and the Outstanding
Collateral Agent, there can be no assurance that the Outstanding Note Trustee
or Outstanding Collateral Agent will not terminate the amended operating
arrangement or take further or other remedial or enforcement action with
respect to the Company's bank accounts or other properties, including
acceleration of the Outstanding Notes and foreclosure. In the event of such an
acceleration and foreclosure, holders of Outstanding Notes might not receive
cash or securities of the same value or having as favorable terms as under the
Prepackaged Plan, and holders of Outstanding Common Shares might not receive or
retain anything.     
   
  Development of the Current Restructuring. During December 1992, it became
apparent to the Company that the Company's projected cash flow would not be
adequate to meet its debt obligations in the future. Thus, the Company began to
consider possible restructuring options for its debt obligations. In
considering possible restructuring options, the Company's goals were (i) to
survive as a going concern and preserve the Company as a real estate investment
vehicle so that the Company's shareholders could enjoy the benefits of an
improved or stabilized real estate market, and (ii) to substantially de-
leverage the capital structure of the Company.     
   
  In January of 1993, the Company began the process of selecting a financial
advisor to assist the Company in formulating the Restructuring. In late January
and early February of 1993, the Company's management interviewed several
potential financial advisors. On February 11, 1993, the Company retained
Houlihan Lokey to act as the Company's financial advisor in connection with the
Restructuring.     
   
  In February of 1993, the Company contacted the Creditors' Committee to
apprise it and the Creditors' Committee Advisors of the Company's forecasted
difficulties. During that same month, the Company and Houlihan Lokey met with
the Creditors' Committee and the Creditors' Committee Advisors to discuss the
Company's condition and prospects. Thereafter, commencing in March of 1993 and
continuing through August of 1993, the Company and the Creditors' Committee and
the Creditors' Committee Advisors negotiated regarding a restructuring of the
Company. During that same time period, from time to time the Company and its
counsel apprised the Equity Committee and its advisors concerning the status of
negotiations regarding the restructuring efforts.     
 
                                       29
<PAGE>
 
          
  While the Company was negotiating with the Creditors' Committee, the Company
and Houlihan Lokey also met with several prospective investors and acquirors to
discuss possible third-party investment in or sale of the Company. Although
several potential third-party investors and acquirors were offered an
opportunity to propose restructuring alternatives, only three Interested Groups
made proposals to the Company and the Creditors' Committee.     
   
  On April 8, 1993, the first Interested Group met with the Company's
management and Houlihan Lokey to discuss a restructuring proposal that valued
the Company at approximately $190 million. The Company believed this value to
be too low to pursue.     
   
  On May 20, 1993, the second Interested Group submitted a proposal to
recapitalize the Company wherein the group would contribute cash and equity in
exchange for a 20% ownership interest in the Company and an 80% ownership
interest in a new partnership in which the second Interested Group would hold a
1% general partner interest and a 79% limited partner interest, while the
Company would hold a 20% limited partner interest. On July 12, 1993, the second
Interested Group submitted a second proposal that valued the Company at $220
million. This proposal contemplated the exchange of the Outstanding Notes for
$120 million of new senior secured notes and new common stock of the
reorganized Company in an amount to be negotiated with the Company's
shareholders.     
          
  On the following day, the third Interested Group submitted a proposal that
valued the Company at $220 million. This proposal contemplated the purchase by
the third Investor Group of 6 million newly issued shares of the reorganized
Company's common stock for an aggregate purchase price of $60 million, subject
to, among other things, the following conditions: (i) the obligations
represented by the Outstanding Notes would be reduced to $100 million, such new
debt to be represented by a new debenture with a market value of $100 million;
(ii) the balance of the Company's creditor obligations and all outstanding
shares of common stock would be exchanged for an aggregate of 12 million shares
of the reorganized Company's common stock; (iii) the issuance of five-year
options to purchase common stock of the reorganized Company sufficient to allow
the third Interested Group's aggregate ownership to equal 51% of the
reorganized Company's fully diluted equity; and (iv) the consummation of the
foregoing transactions through a prepackaged plan of reorganization.     
   
  After reviewing the terms of these proposals, the Creditors' Committee
advised the Company that the offers were not acceptable because the Creditors'
Committee did not believe that it was in the best interests of the Company's
creditors to pursue such third-party participation. The Creditors' Committee's
belief was based on its opinion that the proposals reflected valuations of the
Company that were lower than the value placed on the Company by the Creditors'
Committee and were substantially below the amount of the Outstanding Notes. As
a result, the Company suspended the solicitation of potential third-party
investors or acquirors.     
   
  During April, May and June of 1993, Houlihan Lokey made numerous
presentations to the Creditors' Committee designed to focus the Creditors'
Committee on restructuring proposals that would be consistent with the
Company's restructuring goals. After each presentation, however, the Creditors'
Committee, a majority in interest of which was comprised of institutional
lenders, indicated only that it would review and analyze the materials
presented by Houlihan Lokey in determining its negotiating position regarding a
restructuring.     
          
  On April 8, 1993, Houlihan Lokey made a presentation to the Creditors'
Committee that included (i) an overview of the REIT industry that set forth a
performance survey of secondary offerings, dividend yields for predominantly
mortgage and equity REITs during the period between February 14, 1992 and April
2, 1993, the historic average annual total returns for equity, mortgage and
hybrid REITs, and a comparison of leverage within the REIT industry, (ii) an
overview of the Company that included a description of the Company's investment
portfolio and summaries of the Company's loan collateral and equity properties
by type, and (iii) an overview of the Company's investment portfolio sorted by
investment number, loan and book balance, state and investment type.     
 
                                       30
<PAGE>
 
       
          
  On May 13, 1993, Houlihan Lokey made a presentation to the Creditors'
Committee that included (i) a discussion regarding the Company's objective to
effect a consensual financial restructuring of the Company that maximizes value
for all constituents and the alternative general financing and monetization
structures available to achieve the Company's objective, (ii) a financial
overview of the Company that set forth a consolidated cash flow projection and
reviews of the Company's portfolio by property type, asset classification, and
geographic location, (iii) a preliminary portfolio and enterprise valuation by
asset grade, (iv) an overview of capital markets for REITs that set forth
performance surveys for initial public offerings and secondary offerings, (v) a
REIT industry analysis that set forth an overview of dividend yields, and (vi)
an overview of two possible internal restructuring scenarios where the
Outstanding Notes would be exchanged for either common stock or common stock
and new notes.     
       
          
  On June 14, 1993, Houlihan Lokey made a presentation to the Creditors'
Committee that included (i) the status of discussions with potential third-
party investors and acquirors, (ii) an analysis of the second Interested
Group's proposal, (iii) a discussion regarding whether the capital markets
would embrace the Company's equity, (iv) a discussion regarding general issues
related to creditors' "desired" debt load, and (v) an internal restructuring
term sheet proposed by the Company that contemplated an exchange of the
Outstanding Notes for $100 million in new senior secured notes, $35 million in
new subordinated notes and 80% of the common stock of the reorganized Company.
       
  On June 24, 1993, Houlihan Lokey made a presentation to the Creditors'
Committee that included (i) an occupancy analysis that set forth the current
and projected occupancy levels for all loan and equity properties for the years
1993 through 1997, (ii) an internal restructuring summary term sheet proposed
by the Company pursuant to which the Outstanding Notes would be exchanged for
$100 million of new senior secured notes, up to $100 million in 4% perpetual
preferred stock, and 75% to 87.5% of the common stock of the reorganized
Company, and (iii) a cash flow model for the internal restructuring summary
term sheet that included a financial restructuring summary, a summary balance
sheet, a summary income statement and a summary cash flow statement.     
          
  In early August of 1993, the Equity Committee's financial advisor (the
"Equity Committee's Advisor") commenced a preliminary review of the valuation
analysis performed by Houlihan Lokey. In connection therewith, beginning in
August of 1993 and continuing throughout the course of negotiations, the
Company and Houlihan Lokey provided the Equity Committee's Advisor with, among
other things, (i) a financial overview of the Company and its investment
portfolio, (ii) an overview and analysis of the REIT industry and the capital
markets for REITs, (iii) overviews of possible internal restructuring
proposals, (iv) summaries and analyses of restructuring proposals submitted by
third-party investors, (v) due diligence books, prepared by Houlihan Lokey,
that were provided to prospective third-party investors which included property
and collateral descriptions, cash flow forecasts, lease summaries, photographs
of property, historical operating statements and consolidated Company cash flow
forecasts, (vi) narrative written summaries for each asset that reviewed the
initial funding date, current book value, interest rate terms (if applicable),
description and location of collateral or equity investment, leasing and
property management information, latest available leasing summaries, five-year
cash flow projections, latest appraisals (if conducted), summary and actual
operating statements of collateral or equity investment and photographs of
property, and (vii) other analyses as requested by the Equity Committee's
Advisor.     
   
  On or about August 10, 1993, after extensive negotiations, the Company and
the Creditors' Committee agreed to the broad outlines of a proposed
restructuring, subject to approval by the Board of Trustees. Pursuant to the
terms of the restructuring proposal, the Outstanding Notes would be exchanged
for approximately $195 million of new senior secured notes and common stock
representing approximately 85% of the equity of the reorganized Company. The
restructuring proposal anticipated that the new notes would be issued in two
series: $120 million of 7% notes maturing in 2003 with scheduled annual
principal amortization, and approximately $75 million in additional notes
payable principally from available cash flow. In addition, the restructuring
proposal provided for the payment by the Company on September 30, 1993, of all
outstanding restructuring fees relating to the 1992 Restructuring and the
interest due on the Outstanding     
 
                                       31
<PAGE>
 
   
Notes, with interest to accrue thereafter on the Outstanding Notes at 7%.
Interest accruing through March 31, 1994, would be added to the principal of
the new cash flow notes and any interest accruing after March 31, 1994, would
be paid at closing. Although existing holders of the Company's Outstanding
Common Shares would have retained 15% of the equity of the restructured Company
under this restructuring proposal, the Company's remaining debt level under
this proposal would have been greater than the debt levels thought desirable by
the Company. Moreover, the amortization schedule, required cash sweeps and
restrictions on dividends and other payments to shareholders would have
essentially required an orderly liquidation of the Company.     
   
  At a meeting of the Board of Trustees held on August 18, 1993, the Board of
Trustees unanimously agreed to pursue the 1993 Agreement in Principle set forth
in the August Term Sheet, subject to a number of conditions including, among
other things, the receipt by the Company of written indications of support from
members of the Creditors' Committee and additional holders of sufficient
Outstanding Notes to effect the restructuring through either a prepackaged or
prearranged plan of reorganization under Chapter 11.     
   
  Upon the approval of the terms of the 1993 Agreement in Principle, on August
19, 1993, the Company announced that it had reached a non-binding conditional
agreement in principle with the Creditors' Committee to restructure the
indebtedness represented by the Outstanding Notes. The Company also announced
that the standstill arrangement with its creditors (which had expired on August
16, 1993) had been extended conditionally to September 16, 1993.     
   
  After the terms of the 1993 Agreement in Principle were announced, trading in
the Outstanding Notes increased substantially. By December of 1993, in excess
of 50% of the principal amount of the Outstanding Notes had traded. Included in
the Outstanding Notes initially traded were all of the Outstanding Notes held
by two members of the Creditors' Committee who had not been in favor of the
1993 Agreement in Principle. Consequently, these two members no longer held any
claims against the Company and resigned from the Creditors' Committee.     
   
  In early September of 1993, the Principal Holders requested to be named to
the Creditors' Committee and receive financial and operating information
relating to the Company. On September 21, 1993, the Creditors' Committee met
with the Principal Holders to discuss the restructuring of the Company and the
Principal Holders' request to become members of the Creditors' Committee. As a
result of that meeting, the three then-remaining members of the Creditors'
Committee did not grant committee membership to the Principal Holders but
acquiesced in the Company's delivery of confidential information to the
Principal Holders. Thus, on September 21, 1993, the Principal Holders signed
confidentiality agreements with the Company and commenced a due diligence
review of financial and other information regarding the Company.     
   
  By October 22, 1993, the Equity Committee's Advisors had completed their
preliminary review of Houlihan Lokey's valuation analysis. As a result of its
review, the Equity Committee decided a more detailed analysis of Houlihan
Lokey's valuation was required. The Equity Committee's Advisor believed that
Houlihan Lokey's valuation may have undervalued the Company's assets because
(i) Houlihan Lokey used discount and capitalization rates that allegedly were
higher than industry norms, and (ii) its discounted consolidated cash flow
analysis allegedly underestimated the time value of potential cash flows to
investors in years one through five. Thus, at the Equity Committee's request,
the Equity Committee's Advisor commenced its own valuation of the Company based
upon a limited review of ten of the Company's larger properties. In connection
therewith, the Company agreed to pay certain fees and costs of the Equity
Committee's Advisor's valuation.     
   
  In November 1993, the Principal Holders retained the Principal Holders'
Advisor to evaluate the alternatives available to the Company's creditors,
analyze the cash flows and values of the Company's portfolio, participate in
talks with the Company and its creditors and evaluate the proposals submitted
by the Interested Groups. In connection with such engagement, the Company
agreed to pay the Principal Holders' Advisor's fees, which were expected to be
at least $300,000. On November 3, 1993, the Principal Holders' Advisor signed a
confidentiality agreement with the Company and commenced a review of the
Company's assets.     
 
                                       32
<PAGE>
 
          
  By November of 1993, one of the three remaining members of the Creditors'
Committee had sold all of its Outstanding Notes, part to one of the other
Creditors' Committee members and the balance to other persons. These sales left
the Creditors' Committee with two members, one of whom was the Major Holder who
held in excess of 33 1/3% of the Outstanding Notes.     
   
  By the end of November 1993, the Company had still not received written
indications of support for the 1993 Agreement in Principle from any holders of
Outstanding Notes. Thereafter, the Company suspended all actions to implement
the terms of the 1993 Agreement in Principle and resumed responding to
inquiries from third parties regarding participation in a restructuring of the
Company.     
   
  In early December of 1993, the Principal Holders' Advisor presented an oral
analysis that included a valuation of the Company at approximately $230
million, an amount below the values thought reasonable at the time by the
Company and the two remaining members of the Creditors' Committee. The Company
was not provided with any written report or analysis by the Principal Holders'
Advisors. Throughout December of 1993 and January of 1994, the Company
attempted to bridge the gap in valuations placed on the Company by the various
creditor groups, but was ultimately unsuccessful.     
          
  On December 3, 1993, representatives from the Principal Holders, the
Principal Holders' Advisor, the Major Holder and legal counsel for the
Creditors' Committee met to discuss the possible options for the restructuring
of the Company's debt obligations. The Major Holder favored a restructuring
under which the Company would maintain a substantial amount of debt. The
Principal Holders, on the other hand, favored a restructuring under which the
Company would be substantially de-leveraged. The meeting ended without
resolving the differences in the respective restructuring approaches favored by
the Major Holder and the Principal Holders.     
   
  Subsequent to that meeting, the Major Holder decided that it wanted the
Company to file a voluntary petition for bankruptcy by the end of the year in
order to prevent an alleged loss of tax benefits arising from the Company's net
operating losses (the "NOLs"). The Company disagreed with the Major Holder and
rejected the Major Holder's demand that it file a voluntary bankruptcy
petition. Thus, the Major Holder attempted to force a Chapter 11 filing by,
among other things, demanding that the Outstanding Collateral Agent take action
to preserve and protect the collateral securing the Company's debt, and
suggesting that the Outstanding Collateral Agent freeze the Company's bank
accounts. Consequently, the Outstanding Note Trustee and the Outstanding
Collateral Agent notified the Company's bank of the existence of the
Outstanding Note Trustee's security interest in the Company's deposit accounts
at the bank and instructed the bank to freeze the Company's cash until
otherwise instructed by the Outstanding Note Trustee. Thus, on December 8,
1993, the Outstanding Collateral Agent took action to freeze the Company's
accounts at the Company's bank. Since that date, the Company has administered
its cash on an ad hoc basis, with all use of cash subject to review and
approval by the Outstanding Note Trustee. On or about February 3, 1994, the
Company, the Outstanding Note Trustee and the Outstanding Collateral Agent
reached a further understanding regarding the Company'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
Outstanding Note Trustee or the Outstanding Collateral Agent without the
consent of the holders of the Outstanding Notes, the Company has been permitted
to continue to use its cash on an ad hoc basis, subject to Outstanding Note
Trustee and Outstanding Collateral Agent approval, and to administer its assets
as if no default had occurred and was continuing. See "The Prepackaged Plan--
Background of the Restructuring--Current Defaults."     
   
  At a special meeting of the Board of Trustees held on December 9, 1993,
Houlihan Lokey reported that the Major Holder and the Principal Holders
currently had many irreconcilable differences as to how the restructuring of
the Company should be handled. Houlihan Lokey then outlined the different
positions being taken by the Major Holder and the Principal Holders.
Furthermore, Mr. Strong, the Company's Chief Executive Officer, reported that
the restructuring efforts were in turmoil and that a meeting had been scheduled
for December 13, 1993, to get things "back on track." He further stated that at
the meeting, it was the Company's intent to try to convince the Major Holder
and the Principal Holders to agree to some kind of compromise so that the
Company could continue to operate its business while a consensual restructuring
was being pursued.     
 
                                       33
<PAGE>
 
   
  At the meeting on December 13, 1993, the Major Holder submitted a
restructuring proposal that provided that the Outstanding Notes would be
exchanged for more than $140 million in new senior secured notes and 100% of
the common stock of the reorganized Company, and the Company's existing
shareholders would receive warrants to purchase common stock of the reorganized
Company.     
   
  At a meeting of the Board of Trustees held on December 15, 1993, Houlihan
Lokey and the Company's legal counsel, Milbank, Tweed, Hadley & McCloy
("Milbank") reported on the results of the meeting with the creditors and other
interested parties held on December 13, 1993, and reviewed the provisions of a
draft term sheet, dated December 14, 1993, prepared by the Company based on the
terms and conditions of the Major Holder's December 13, 1993, proposal. A
lengthy discussion ensued as to the negotiating stance the Company might assume
in connection with the various provisions of the term sheet in order to
preserve those concepts in the Major Holder's proposal that the Company
considered to be most important to the Company and its shareholders, such as
reducing the Company's debt level and the participation by the existing
shareholders in the equity of the reorganized Company. The trustees also noted
that their approval would be required on any agreement reached as a result of
any negotiations regarding the draft term sheet.     
   
  During this time period while the Company was attempting to restructure its
obligations, the Company continued to operate, even though it was in default,
due to the lack of foreclosure action by the Outstanding Note Trustee. The
Outstanding Note Trustee failed to foreclose because it was receiving
conflicting orders from the Major Holder and the Principal Holders, who could
not agree on the capital structure of the Company to be attained by a
restructuring.     
   
  At a meeting of the Board of Trustees held on January 10, 1994, Milbank
reported that the creditors were still split primarily into two camps: the
Principal Holders, who preferred a substantially de-leveraged Company, and the
Major Holder, who preferred substantial levels of senior debt. At a meeting of
the Board of Trustees held on February 9, 1994, Mr. Strong reported that
nothing had changed regarding the impasse between the Major Holder and the
Principal Holders regarding the financial restructuring, and that the only
progress made was that the two groups had met on several occasions.     
   
  Throughout the second and third quarters of fiscal 1994, the Company's
management and advisors continued discussions with the Major Holder and the
Principal Holders (who, as of March 31, 1994, held 32.9% of the Outstanding
Notes) and their representatives to explore various alternatives for
restructuring the Outstanding Notes that would resolve the impasse between the
Major Holder and the Principal Holders.     
   
  In March of 1994, the Principal Holders requested that the Company agree to
pay certain fees and expenses of legal counsel to the Principal Holders. The
Company agreed and, on or about March 17, 1994, the Principal Holders retained
O'Melveny & Myers to act as their legal counsel in connection with any proposed
restructuring.     
   
  At a meeting of the Board of Trustees held on April 20, 1994, the Board of
Trustees considered (i) the April 1994 Proposal, which was based on a court-
approved valuation of the Company (assumed to be $230 million) and provided
that (a) the Bankruptcy Court would determine the value of the Company, (b)
holders of the Outstanding Notes would receive new senior secured notes
convertible to common stock of the reorganized Company in an aggregate
principal amount equal to the court-approved value of the Company, (c) the
remaining principal amount of the Outstanding Notes would become unsecured
claims, (d) the holders of unsecured claims would receive nothing, (e) the
existing Common Shares would be cancelled, and (f) the Principal Holders would
enter into a sharing agreement with the existing shareholders pursuant to which
the Principal Holders would convert their new senior secured notes into shares
representing 100% of the common stock and give 4% of such stock to the existing
shareholders, (ii) a restructuring term sheet, dated April 11, 1994, proposed
by the Major Holder, under which the Major Holder's Outstanding Notes would be
exchanged for approximately $99.4 million of new senior secured notes (which
would enjoy the benefit of restricted covenants that would prevent the
distribution of cash to shareholders until such notes have been repaid)
and all other Holders' Outstanding Notes would be exchanged for 100% of the
common stock of the     
 
                                       34
<PAGE>
 
   
reorganized Company, and the existing shareholders would receive warrants to
purchase new common shares representing, in the aggregate, 6% of the fully
diluted common stock of the reorganized Company, (iii) an analysis of the two
term sheets, dated April 19, 1994, prepared by Houlihan Lokey, that set forth,
among other things, a summary of the terms of each proposal, a description of
the assumptions used, and the potential recoveries and the value of the rights
offered to participants under each proposal, and (iv) an updated asset
valuation summary for the Company, dated March 2, 1994, prepared by Houlihan
Lokey which valued the Company at $261 million to $317 million. Milbank then
reported in considerable detail all of the events regarding the restructuring
that had transpired since the last meeting on March 16, 1994. Thereafter, the
Board of Trustees determined that Milbank and Houlihan Lokey should continue to
negotiate with the creditors and attempt to reach an agreement on a
restructuring based on the April 1994 Proposal proposed by the Principal
Holders.     
   
  On April 25, 1994, based upon a limited review of ten of the Company's
properties by the Equity Committee's Advisor, the Equity Committee informed the
Company that it believed that the Company's going concern value was no less
than $312 million. In order to verify its preliminary conclusions, the Equity
Committee sought authorization from the Company to have the Equity Committee's
Advisor complete its analysis. The Equity Committee's Advisor, however, never
provided the Company with a written valuation. The Equity Committee, however,
did inform the Company that it believed that the Company's going concern value
was approximately $330 million to $340 million. Neither the Equity Committee
nor the Equity Committee's Advisor ever provided any supporting documentation
or basis for its assertions regarding the value of the Company.     
   
  On April 26, 1994, representatives of the Company, Houlihan Lokey, Milbank,
the Major Holder, legal counsel for the Creditors' Committee, O'Melveny & Myers
and the Principal Holders met to attempt to resolve the differences in the
respective restructuring approaches of the Major Holder and the Principal
Holders. During this meeting, the Principal Holders presented the April 1994
Proposal to the Major Holder. The Major Holder, however, would not agree to the
Principal Holders' April 1994 Proposal because, among other things, the
reorganized Company would not retain debt levels satisfactory to the Major
Holder.     
   
  At a meeting of the Board of Trustees held on May 18, 1994, Milbank and
Houlihan Lokey reported on the status of the restructuring since the April 20,
1994, meeting. The Board of Trustees learned that the meeting of all concerned
parties in late April produced no agreement whatsoever between the two creditor
factions. The Board of Trustees then reviewed various scenarios which might be
expected to evolve in light of this impasse and their associated risks, and
reviewed the different valuations being placed on the Company by the various
entities involved in the restructuring efforts. The Board of Trustees
determined that the Company's advisers should continue their negotiations with
the concerned parties to the restructuring and attempt to reach an agreement on
a restructuring based on the April 1994 Proposal proposed by the Principal
Holders.     
   
  In May and June of 1994, the Creditors' Committee, the Principal Holders and
the Company had several contacts with the Equity Committee to attempt to reach
agreement on a consensual plan to restructure the Company. Such attempts,
however, proved unsuccessful because of the inability to agree upon the terms
of a mutually acceptable restructuring.     
   
  In June of 1994, the Principal Holders requested that the Company retain an
additional valuation firm to perform a special purpose valuation of the
Company. At a meeting of the Board of Trustees held on June 15, 1994, the Board
of Trustees considered this request. The Board of Trustees agreed that if such
an additional special purpose valuation might lead to the negotiation of a
consensual agreement among the creditors and also result in fair treatment of
the shareholders, it would be worth the additional expense. After further
discussions with the Major Holder, the Principal Holders and their advisors,
the Company agreed to retain Kenneth Leventhal, the firm specified by the
Principal Holders, to perform an additional valuation analysis on the Company
and to provide such valuation analysis to the Creditors' Committee, the
Principal Holders and the Equity Committee. The Company agreed to retain
Kenneth Leventhal because Kenneth     
 
                                       35
<PAGE>
 
   
Leventhal was familiar with the Company's portfolio as a result of a due
diligence investigation undertaken in early 1993 on behalf of a potential
equity investor, and also because of Kenneth Leventhal's expertise in the area
of financial restructuring and real estate due diligence and valuation. Thus,
on June 24, 1994, the Company retained Kenneth Leventhal to perform a special
purpose valuation of the Company. See "Special Purpose Valuation Reports of
Kenneth Leventhal" below.     
   
  On or about August 5, 1994, the Creditors' Committee member that was not the
Major Holder sold all of its Outstanding Notes to the Principal Holders and
certain other persons. With this sale, the only remaining member of the
Creditors' Committee was the Major Holder. On or about September 9, 1994,
Milbank received telephonic notice from the Creditors' Committee's counsel that
the Creditors' Committee had ceased to operate.     
   
  On or about September 14, 1994, the Company's advisors, the Equity
Committee's advisors and counsel to the Principal Holders met in a final
attempt to negotiate the treatment of equity in the context of a prepackaged
plan of reorganization based on the April 1994 Proposal. At this meeting, the
Company and the Principal Holders outlined the terms of the April 1994 Proposal
with the Equity Committee's advisors in order to determine whether the Equity
Committee would accept 4% of the common stock of the reorganized Company. At
the conclusion of the meeting, the Equity Committee's advisors agreed to
recommend to the Equity Committee that it accept one of the following two
proposals: (i) 5% of the common stock of the reorganized Company and four-year
warrants to purchase new common shares representing 7 1/2% of the common stock
of the reorganized Company at a strike price per share reflecting a market
capitalization of $190 million; or (ii) 4% of the common stock of the
reorganized Company and 5.5 year warrants to purchase new common shares
representing 10% of the common stock of the reorganized Company at a strike
price per share reflecting a market capitalization of $160 million. In return,
the Principal Holders' legal advisor agreed to discuss incorporating these
proposals into the April 1994 Proposal with the Principal Holders.     
          
  On October 4, 1994, Kenneth Leventhal produced its special purpose report,
which placed the Company's approximate going concern value as of July 1, 1994,
between $255 million and $275 million. Because Kenneth Leventhal's report
placed the Company's value higher than the $230 million value assumed by the
April 1994 Proposal, the Principal Holders decided to abandon the April 1994
Proposal. Thus, the Company renewed its efforts to negotiate a deal with the
Principal Holders that was acceptable to the Equity Committee. The Company, the
Principal Holders and the Equity Committee, however, were unable to reach
agreement on the terms of a restructuring because the Equity Committee wanted
existing shareholders to receive more than 3% of the common stock of the
reorganized Company, and the Principal Holders were unwilling to give a greater
percentage because, under Kenneth Leventhal's special purpose valuation, the
Company was insolvent and the existing equity was valueless.     
   
  On or about October 27, 1994, the Major Holder and the Principal Holders
submitted a proposal for a prepackaged restructuring of the Company. Pursuant
to the proposal, the Company would retain all of its assets and have between
$10 million and $15 million of cash following the restructuring. The
Outstanding Notes would be exchanged for $110 million of new senior secured
notes and 98% of the common stock of the reorganized Company. Common stock
retained by the existing shareholders would represent 2% of the reorganized
Company's common stock. Thereafter, the Company and Houlihan Lokey spent
several weeks negotiating with such holders regarding the proposed equity split
between the holders of Outstanding Notes and the existing shareholders.     
   
  The Equity Committee was not involved in these negotiations because the Major
Holder and the Principal Holders believed that the Equity Committee's
involvement at this point would have been futile based on the parties' prior
inability to reach an agreement on the treatment of the existing shareholders
in a restructuring. The Company was extremely concerned that the holders of
Outstanding Notes would attempt to and succeed in eliminating the interests of
the existing shareholders. As a result, the Company believed that it was their
paramount duty to protect the existing shareholders from losing their entire
economic stake.     
 
                                       36
<PAGE>
 
   
Thus, the Company immediately commenced negotiations with the Major Holder and
the Principal Holders to provide a greater recovery to the existing
shareholders than that offered under the October 27, 1994, proposal.     
   
  In November of 1994, the Company reached a non-binding agreement in principle
with the Major Holder and the Principal Holders. Pursuant to the agreement in
principle, upon shareholder approval, pursuant to a prepackaged Chapter 11
reorganization, holders of the Outstanding Notes would receive (i) $110 million
of new senior secured notes due 2002, (ii) approximately $50 million in cash,
and (iii) common stock representing 97% of the common stock of the reorganized
Company (or, if the Company's existing shareholders did not vote to accept the
Prepackaged Plan, substantially all of the common stock of the reorganized
Company). The existing shareholders would retain their shares, which would
represent the remaining 3% of the reorganized Company's common stock, provided
that they voted to accept the Prepackaged Plan. The holders of unsecured claims
would receive cash in the allowed amount of their respective claims.     
   
  At a meeting of the Board of Trustees held on November 16, 1994, the trustees
and the Company's management, Milbank and Houlihan Lokey discussed (i) the
terms and conditions of the proposed Restructuring, (ii) the discussions,
negotiations and alternative proposals leading to the Restructuring proposal,
(iii) the feasibility of the proposed Restructuring and its effect on the
Company's cash flow, (iv) the lack of other restructuring alternatives
available to the Company, and (v) the fairness of the proposed Restructuring to
the Company's shareholders and creditors. The Board of Trustees also considered
management's internal analyses of the proposed Restructuring, which included a
discussion of the management's views regarding (i) the advantages and
disadvantages of the proposed Restructuring and the alternative proposals
leading to the proposed Restructuring, and (ii) the effect of both the proposed
Restructuring and the prior alternative proposals on the Company, its creditors
and shareholders. After lengthy consideration and discussion of these matters,
the trustees unanimously approved the Restructuring, subject to approval by the
Board of Trustees of the final documentation necessary to effect the
restructuring. See "Recommendation of the Board of Trustees" below. The Board
of Trustees then authorized the Company's management to proceed with the steps
necessary to effect the proposed Restructuring.     
   
  On November 17, 1994, the Company announced that it had reached a non-binding
agreement in principle with the Major Holder and the Principal Holders to
restructure the indebtedness represented by the Outstanding Notes. In
connection therewith, the Company issued a press release describing the
material terms of the Restructuring.     
   
  On the following day, representatives of the Equity Committee advised the
Company that the Equity Committee could not make a recommendation to the
Company's shareholders with respect to the proposed Restructuring until the
Company supplied the Equity Committee with the Company's cash flow projections,
assumptions and current financial information. On November 21, 1994, the
Company supplied the Equity Committee with the requested information. On
November 22, 1994, the Equity Committee filed a "Notice of Dissolution of
Equity Committee" (the "Notice") in the Bankruptcy Court wherein the Equity
Committee stated that it had dissolved, effective as of the close of business
on November 22, 1994. The Notice stated that the Equity Committee had dissolved
because, among other things, (i) the Company had allegedly reached its
agreement in principle without any discussion or input from the Equity
Committee or its advisors, (ii) the Company had allegedly refused to supply
adequate information to the Equity Committee and its advisors, including, but
not limited to, cash flow projections, assumptions and financial information
with respect to the Company and each of its specific project holdings, (iii)
the Company and its advisors had allegedly refused to discuss the Company's
cash flow projections, assumptions and financial information with the Equity
Committee, and (iv) the Equity Committee, due to its alleged lack of
information, was unable to conclude that the proposed Restructuring was fair or
equitable to the Company's shareholders. On November 29, 1994, the Company
informed the Equity Committee that the Company disagreed with many of the
purported factual statements contained in the Notice and that the Company
believed that the Notice was misleading.     
 
                                       37
<PAGE>
 
   
  Subsequent Events. On March 15, 1995, the Major Holder sold all of its
Outstanding Notes to the New Major Holder. This change in holdings of
Outstanding Notes had no material effect on the terms of the previously
negotiated non-binding agreement in principle among the Company, the Major
Holder and the Principal Holders. In April 1995, the Company and the Principal
Holders entered into the Agreement of Understanding pursuant to which the
Company agreed to distribute to the holders of Outstanding Notes $25.0 million
in cash prior to the Petition Date. Under this agreement, the Principal
Holders, among other things, agreed to vote when solicited in favor of the
Prepackaged Plan. On April 11, 1995, the Company paid $25.0 million pursuant to
the Agreement of Understanding, with such payment to be credited against the
cash payment of at least $50 million to be made to the holders of the
Outstanding Notes pursuant to the Prepackaged Plan.     
   
RECOMMENDATION OF THE BOARD OF TRUSTEES     
   
  On November 16, 1994, the Company's Board of Trustees met to consider the
proposed Restructuring. In connection therewith, the Board of Trustees heard
presentations from the Company's management and the Company's financial and
legal advisors describing the discussions, negotiations and alternative
proposals leading to the Restructuring and described above. See also "--Reports
of Houlihan Lokey as Financial Advisor to the Company" below. At the request of
the Board of Trustees, the Company's management and financial advisors
described the feasibility of the Restructuring and its effect on the Company's
capital structure and its cash flow problems described above. In addition, the
Board of Trustees discussed other restructuring alternatives available to the
Company. After lengthy consideration and discussion of these matters, the Board
of Trustees voted unanimously to approve in principle the terms of the
Restructuring, subject to approval by the Board of Trustees of the final
documentation required to implement the Restructuring and to confirm the
Prepackaged Plan, and to authorize management to proceed with the steps
necessary to effect the Restructuring.     
   
  The Board of Trustees believes that the Restructuring is necessary to make it
possible for the Company to satisfy its outstanding obligations and remain in
business and provide the shareholders with the best opportunity to receive any
value or recovery, having determined that the Restructuring is fair to the
unaffiliated Holders of the Company's Outstanding Securities and other Claims
and Interests. See "--Purposes of the Restructuring" below.     
   
  THE COMPANY'S BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED THE RESTRUCTURING
AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT ALL HOLDERS,
INCLUDING HOLDERS OF OUTSTANDING COMMON SHARES, VOTE IN FAVOR OF THE
RESTRUCTURING AND THE TRANSACTIONS CONTEMPLATED THEREBY.     
   
  In evaluating the recommendation of the Board of Trustees, all Holders should
consider carefully the factors described under "Special Factors and Certain
Considerations," which include discussions regarding (i) the financial
condition of the Company, including liquidity, (ii) the Company's continuing
leverage, (iii) foreclosure and bankruptcy alternatives, (iv) the possible
further decline of real estate markets, (v) disruption of the Company's
business, (vi) considerations relating to the Prepackaged Plan, (vii) certain
bankruptcy considerations if the Prepackaged Plan is not confirmed and the
Restructuring is not otherwise consummated, (viii) certain consequences to non-
voting holders of Common Shares, (ix) risks relating to the projections, (x)
dividend restrictions, (xi) the absence of a public market, (xii) the releases
provided for by the Restructuring, and (xiii) certain federal income tax
consequences of the Prepackaged Plan.     
          
  Approval by the Board of Trustees. In considering the Restructuring, the
Board of Trustees considered, among other things, the factors set forth below.
       
  .  The Board of Trustees' familiarity with the Company's business,
     operations and financial condition and its future prospects, including
     the financial difficulties facing the Company as a result of the
     shortfall in operating cash flow in fiscal 1993 and fiscal 1994 and
     forecasted shortfall for fiscal 1995 and beyond, and the inability
     of the Company to secure adequate financing for its ongoing     
 
                                       38
<PAGE>
 
        
     operations as long as the Outstanding Notes remained outstanding. The
     Board of Trustees noted that without the Restructuring, the Company
     would be unable to service its outstanding obligations and could be
     forced to liquidate.     
     
  .  The fact that consummation of the Restructuring appeared to be the only
     viable way for the Company to deal with its outstanding obligations and
     continue to operate its business.     
     
  .  The Company's range of enterprise going concern value of $265 million to
     $285 million and range of liquidation value of $220 million to $260
     million, based on the special purpose valuation reports of Kenneth
     Leventhal, are in each case substantially less than the Company's
     liabilities, which include, among other things, approximately $323
     million of liabilities with respect to principal and accrued interest in
     respect of the Outstanding Notes.     
     
  .  The Board of Trustees' review of monthly reports on the status of the
     Restructuring, as presented by the Company's financial and legal
     advisors, as well as valuations of the Company reflected from time to
     time in the various proposals of the Interested Groups, the Major Holder
     and the Principal Holders.     
     
  .  Presentations by the Company's management and its legal advisors, each
     of whom reviewed various considerations with the Board of Trustees. In
     particular, the Board of Trustees noted that based on the valuations of
     the Company prepared by Houlihan Lokey, the special purpose valuations
     prepared by Kenneth Leventhal and management's internal analyses,
     foreclosure or a liquidation of the Company would yield a much smaller
     return to the holders of Claims and would leave nothing for the holders
     of the Outstanding Common Shares. Thus, a restructuring that resulted in
     a potential return to the holders of the Company's equity securities was
     determined to be superior to the real possibility that they would
     receive nothing in a foreclosure or liquidation.     
     
  .  Presentations by Houlihan Lokey and the results of discussions with
     other parties concerning proposals for the Restructuring and potential
     alternatives to the Restructuring. In particular, the Board of Trustees
     placed substantial weight on the tentative willingness of certain third
     parties to invest in the Company upon consummation of the Restructuring
     and the unwillingness of such investors to make a capital investment in
     the Company absent successful completion of the Restructuring in the
     form presented.     
     
  .  The historical and current market prices of the Company's Outstanding
     Common Shares, as well as the net book value of the Company's assets per
     share, both before giving effect to the Restructuring and on a pro forma
     basis after giving effect to the Restructuring, and when compared to a
     liquidation of the Company.     
     
  .  The fact that the Major Holder and the Principal Holders had retained
     separate financial and legal advisors, had negotiated at arm's-length
     with the Company and its financial and legal advisors after a review of
     the Company and its prospects and had agreed upon the terms of the
     Restructuring in preference to a liquidation or other alternatives.     
   
  Based on the foregoing, the Board of Trustees determined that the
Restructuring was fair to the Holders and determined to recommend approval of
all elements of the Restructuring.     
   
  In view of the wide variety of factors considered by the Board of Trustees in
connection with its evaluation of the Restructuring, the Board of Trustees did
not find it practicable to quantify or otherwise attempt to assign relative
weights to the specific factors considered in making its determination, nor did
it evaluate whether such factors were of equal weight. As a general matter, the
Board of Trustees believes that the factors discussed above supported its
decision to approve the Restructuring.     
   
SPECIAL PURPOSE VALUATION REPORTS OF KENNETH LEVENTHAL     
   
  Engagement. In June of 1994, Kenneth Leventhal was engaged to prepare a
special purpose valuation of the Company and its investment portfolio in
order to assist the Company and its various interested creditor     
 
                                       39
<PAGE>
 
   
parties in determining an appropriate basis for valuation of a potential
restructuring transaction. Kenneth Leventhal is a nationally recognized firm of
certified public accountants. The Company selected Kenneth Leventhal to perform
such special purpose valuation at the request of the Principal Holders and
because of Kenneth Leventhal's qualifications, expertise and reputation in the
area of financial restructuring and real estate due diligence and valuation.
Also, Kenneth Leventhal was familiar with the Company's portfolio as a result
of a comprehensive due diligence investigation of all assets in the Company's
portfolio undertaken in early 1993 on behalf of a potential equity investor and
for the use and benefit of such potential investor.     
   
  As compensation for its services, the Company agreed to pay Kenneth Leventhal
a fee of $2,000 per asset for which Kenneth Leventhal would perform a special
purpose valuation or updated special purpose valuation, plus applicable out-of-
pocket expenses and fees incurred by Kenneth Leventhal in connection with its
engagement.     
   
  Valuations of Company. On October 4, 1994, Kenneth Leventhal produced a
report which placed the Company's going concern value as of July 1, 1994,
between $255 million and $275 million and its liquidation value of between $210
million and $240 million. At the Company's request, in April and May of 1995,
Kenneth Leventhal updated its analysis using the same methodology it used to
prepare its October 1994 report. On May 31, 1995, Kenneth Leventhal provided
the Company with updated reports dated May 15, 1995, that placed the Company's
going concern value as of March 31, 1995, between $265 million and $285 million
and its liquidation value between $220 million and $260 million. Kenneth
Leventhal's May 15, 1995 reports (the "Kenneth Leventhal Reports"), which set
forth assumptions made, matters considered and limits on the review undertaken,
are included as Annexes C and D to this Disclosure Statement. Kenneth Leventhal
has granted its consent to the use of its reports included as Annexes C and D
to this Disclosure Statement. The summary of the Kenneth Leventhal Reports
herein is qualified in its entirety by reference to the full text of such
reports and their respective exhibits. The special purpose valuations set forth
in the Kenneth Leventhal Reports do not reflect the $25 million payment made on
April 11, 1995, pursuant to the Agreement of Understanding.     
   
  To assist Kenneth Leventhal, the Company provided it with certain data and
information relative to the portfolio maintained by the Company. In preparing
its valuations, Kenneth Leventhal relied upon the accuracy and completeness of
the data and information provided to it by the Company and did not assume any
responsibility for any independent verification of such information. The
services provided by Kenneth Leventhal did not constitute independent asset
appraisals. In relying on the data and information provided to it by the
Company, Kenneth Leventhal assumed that such information was reasonably
prepared based on assumptions reflecting the best currently available estimates
and judgments by the Company's management as to the expected future results of
operations and financial condition of the Company to which such analyses or
forecasts relate. Kenneth Leventhal further relied upon the assurances of the
Company's management that it is unaware of any facts that would make the
information provided to Kenneth Leventhal incomplete or misleading. The Kenneth
Leventhal reports were based on economic, monetary, market and other conditions
as they existed and could be evaluated as of the respective dates of the
Kenneth Leventhal reports. ALL HOLDERS, INCLUDING HOLDERS OF OUTSTANDING COMMON
SHARES, ARE ENCOURAGED TO READ THE KENNETH LEVENTHAL REPORTS IN THEIR ENTIRETY.
       
  In preparing its reports, the Company instructed Kenneth Leventhal to
determine the valuation of the Company's portfolio on a going concern basis.
The assumptions utilized by the Company and reviewed by Kenneth Leventhal
included normal collection of amounts due on mortgage loans and cash flow from
operating properties. To determine a going concern valuation, the assumptions
were predicated on the orderly collection and selected disposal of assets over
a period of several years. Moreover, Kenneth Leventhal's going concern
valuation was not reflective of values which would result from a distressed
sale, forced liquidation, or disposition of the portfolio in a bulk sale or any
other accelerated manner. In addition to these specific portfolio valuation
procedures, the Company further instructed Kenneth Leventhal to approximate a
range of valuation for the total enterprise as of July 1, 1994, and later as of
March 31, 1995, utilizing the Company's then-most recently available financial
statements.     
 
                                       40
<PAGE>
 
   
  In conducting its valuations, Kenneth Leventhal obtained selected publicly-
available financial information prepared by the Company as of June 30, 1994,
and later as of March 31, 1995. Utilizing this information, Kenneth Leventhal
selected 26 assets representing mortgage loans, investments, in-substance
foreclosure assets and real estate equities owned. The selection was divided
between the West Coast and East Coast portfolios and generally represented the
highest dollar values in the portfolios. In addition, the selection of assets
included different asset classifications.     
   
  Utilizing the portfolio so selected, Kenneth Leventhal, among other things,
(i) obtained the most recent "Argus" property cashflow projections for the
properties selected, (ii) obtained, where applicable, the most recent operating
rent roll and other financial information relative to the assets selected,
(iii) obtained the most recent appraisals, where applicable and available, (iv)
obtained the previous Kenneth Leventhal analyses performed as of March 1993 and
July 1994, (v) discussed the current status with the respective asset manager
to determine loan status, property characteristics, current occupancy, existing
market rental rates, new leases, current payoff discussions and asset sales,
(vi) reviewed limited market information for the properties, including selected
submarket information, if available, (vii) modified the Company's assumptions,
as necessary, to conform to certain known current market conditions and Kenneth
Leventhal's understanding of the assets, (viii) updated the valuation model
prepared by Kenneth Leventhal in 1993 and 1994 utilizing current market and/or
assumption modifications determined from the procedures provided above, and
(ix) calculated estimated asset values on both a going concern and liquidation
value basis.     
   
  Copies of Kenneth Leventhal's reports will be made available for inspection
and copying at the principal executive offices of the Company during regular
business hours by any holder of Outstanding Notes, Outstanding Common Shares
and Other Secured Claims and Unsecured Claims of the Company, or the
representative of such holder who has been designated in writing as such by
such holder.     
   
REPORTS OF HOULIHAN LOKEY AS FINANCIAL ADVISOR TO THE COMPANY     
   
  Houlihan Lokey was engaged to act as the Company's financial advisor and to
render its opinion in connection with the Restructuring and a possible sale of,
or investment in, the Company pursuant to an engagement letter executed on
February 11, 1993. In connection therewith, Houlihan Lokey performed a due
diligence investigation on a majority of the Company's assets and prepared
sales material to be presented to prospective investors in or purchasers of the
Company. In addition, Houlihan Lokey performed valuations of the Company and
explored several alternative restructuring possibilities for the Company
including, but not limited to, a merger or sale of the Company, a refinancing
coupled with a debt for equity exchange offer and a liquidation of the Company.
In connection therewith, Houlihan Lokey made numerous presentations to the
Board of Trustees and the Creditors' Committee.See "--Presentations to the
Company's Board of Trustees" and "--Presentations to the Creditors' Committee"
below.     
          
  Engagement. Houlihan Lokey is a nationally recognized investment banking firm
which regularly engages in the valuation of businesses and their securities in
connection with restructurings both in and out of bankruptcy. Houlihan Lokey
provides financial advisory services and execution capabilities in the areas of
financial restructuring, investment banking, business and securities valuation
and investment management. In the area of financial restructuring, Houlihan
Lokey has provided financial advice, valuation analyses and investment banking
services to debtors, secured and unsecured creditors, acquirors, employee stock
ownership plans, equity holders and other parties-in-interest involved with
financially troubled companies both in and out of bankruptcy. The Houlihan
Lokey Financial Restructuring Group is headed by four managing directors
overseeing a staff of over 25 professionals dedicated to financial
restructuring engagements. The Company selected Houlihan Lokey as its financial
advisor because of Houlihan Lokey's qualifications, expertise and reputation in
the area of financial restructuring. Prior to its engagement, Houlihan Lokey
did not have any material relationship with the Company.     
   
  As compensation for its services as financial advisor to the Company in
connection with the      Restructuring, the Company initially agreed to pay
Houlihan Lokey a fee of $75,000 per month (the
 
                                       41
<PAGE>
 
   
"Monthly Fee"), plus reimbursement for reasonable and actual out-of-pocket
expenses incurred by Houlihan Lokey in connection with the Restructuring. In
addition, if the Restructuring is consummated, Houlihan Lokey will receive a
fee equal to 0.5% of the face amount of debt restructured, modified, converted
or forgiven payable upon closing of the Restructuring (the "Completion Fee").
The Company also agreed to indemnify Houlihan Lokey for certain liabilities
arising from its participation as the Company's advisor. Pursuant to a letter
agreement that memorialized certain prior verbal modifications to the terms of
Houlihan Lokey's engagement dated March 16, 1995, effective January 1, 1994,
Houlihan Lokey had reduced its Monthly Fee to $50,000 and effective June 1,
1994, Houlihan Lokey had reduced its Monthly Fee to $10,000. Effective November
1, 1994, the Company had agreed to resume paying Houlihan Lokey a monthly fee
of $75,000 (the "New Monthly Fee"), provided that the New Monthly Fees
(beginning November 1, 1994, and continuing through the closing of the
Restructuring) would be fully credited against the Completion Fee. Furthermore,
Houlihan Lokey's aggregate Completion Fee was set at $1,450,000 less the New
Monthly Fees paid to, and received by, Houlihan Lokey (the "Completion Fee
Balance") and pursuant to a letter agreement dated April 7, 1995, the
Completion Fee Balance was further reduced by $112,500. The Completion Fee
Balance is payable in cash only.     
       
       
          
  Presentations to the Company's Board of Trustees. During the period from
February 11, 1993 through the date of this Disclosure Statement, Houlihan Lokey
prepared and presented monthly overviews, both written and oral, on the status
of the Restructuring. Such reports included updates on the progress of Houlihan
Lokey's due diligence, the status of potential third-party investors and/or
purchasers, the status of negotiations with the Creditors' Committee, the
status of the valuation of the Company's restructure value, summaries and
analyses of restructuring proposals submitted by third-party investors and
possible Company counter-proposals and summary analyses of various internal
restructuring scenarios. See "--Background of the Restructuring--Development of
the Current Restructuring" above.     
   
  While the Company was negotiating with the Creditors' Committee, the Company
and Houlihan Lokey met with several prospective investors to discuss possible
third-party investment in or purchase of the Company. Although all potential
third-party investors were offered an opportunity to propose restructuring
alternatives, only three prospective investors made formal proposals to the
Company and the Creditors' Committee. In connection therewith, Houlihan Lokey
prepared summary descriptions and analyses of each such proposal as well as
possible counter-proposals. In analyzing each proposal, Houlihan Lokey also
prepared summaries of equity ownership, noteholder recoveries and shareholder
recoveries.     
   
  Presentations to the Creditors' Committee. Houlihan Lokey also made several
presentations to the Creditors' Committee during the period from April 8, 1993,
through June 24, 1993. Such presentations included an overview of the REIT
industry and the capital markets for REITs, a financial overview of the Company
and its investment portfolio, overviews of possible internal restructuring
proposals, the status of potential third-party investors and/or purchasers, and
summaries and analyses of restructuring proposals submitted by third-party
investors.     
   
  Valuation Reports. At the Company's request, Houlihan Lokey performed several
valuations of the Company on a going concern basis utilizing a variety of
generally accepted valuation methods. See "--Valuation Methodologies" below.
Houlihan Lokey's most recent valuation report presented to the Board of
Trustees, the Equity Committee and the Creditors' Committee, prepared as of
December 31, 1993, valued the Company's Restructure Value between $261 million
and $317 million. "Restructure Value" means the fair market value of the
Company available for those noteholders, unsecured creditors and shareholders
in a restructuring. Because the valuation analyses for these reports were
performed as of dates more than one year ago, the Company's actual going
concern value may have changed significantly due to changes in the various
factors on which such an analysis depends. Thus, investors are cautioned not to
place undue reliance on the range of values set forth in Houlihan Lokey's
valuation reports.     
          
  Valuation Methodologies. In connection with the preparation of its valuations
and the various written and oral presentations it made to the Company and
Creditors' Committee (the "Houlihan Lokey Materials")     
 
                                       42
<PAGE>
 
   
from time to time, Houlihan Lokey utilized a variety of generally accepted
valuation methods. Set forth below is a brief summary of the valuation methods
employed by Houlihan Lokey in connection with the preparation of its valuations
and the Houlihan Lokey Materials. The summary set forth below does not purport
to be a complete description of the analyses or data presented by Houlihan
Lokey. The preparation of a valuation opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant
methods of financial analyses and application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Houlihan Lokey did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly,
notwithstanding the separate factors summarized below, Houlihan Lokey believes
that its analyses must be considered as a whole and that selecting portions of
its analyses or certain of the factors considered by it, without considering
all analyses and factors, could create a misleading or incomplete view of the
process underlying such analyses and its opinion.     
   
  In preparing its valuations and the Houlihan Lokey Materials, Houlihan Lokey
relied upon the accuracy and completeness of the financial and other
information provided to it by the Company and did not assume any responsibility
for any independent verification of such information. In relying on the
financial and other information provided to it by the Company, Houlihan Lokey
assumed that such information was reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by the
Company's management as to the expected future results of operations and
financial condition of the Company to which such analyses or forecasts relate.
Houlihan Lokey further relied upon the assurances of the Company's management
that it is unaware of any facts that would make the information provided to
Houlihan Lokey incomplete or misleading. No limitations were imposed by the
Company upon Houlihan Lokey with respect to the investigations made or
procedures followed by Houlihan Lokey in rendering its analyses and opinions,
and the Company's management cooperated fully with Houlihan Lokey in connection
therewith. The Houlihan Lokey Materials and Houlihan Lokey's valuations were
based on economic, monetary, market and other conditions as they existed and
could be evaluated as of the respective dates of the Houlihan Lokey Materials
and Houlihan Lokey's valuations.     
   
  In preparing its valuations and conducting its analyses and preparing its
numerous presentations, Houlihan Lokey, among other things, (i) reviewed
summary documentation on all of the Company's material assets including the
Company's loan collateral, (ii) interviewed all asset managers, (iii) reviewed
and provided input to the formulation of individual asset disposition and
business plans, (iv) assisted in the formulation of the Company's prepared
asset cash flow forecasts, (v) performed on-site visits of selected
Philadelphia and Los Angeles assets (collateral and ownership interests), (vi)
prepared due diligence books to provide to prospective investors, which
included property/collateral descriptions, cash flow forecasts, lease
summaries, photographs of property, historical operating statements and
consolidated Company cash flow forecasts, (vii) compiled a due diligence
library for prospective investors, which included narrative written summaries
for each asset reviewing the initial funding date, current book value, specific
valuation reserves, charge-off amounts, interest rate terms (if applicable),
description and location of collateral or equity investment, summary market
area analysis, leasing and property management information, latest available
leasing summaries, five-year cash flow projections, the latest appraisals (if
conducted within the past 18 months), environmental reports, summary and actual
operating statements of collateral or equity investment, and photographs of
property, (viii) reviewed and analyzed certain historical business and
financial information relating to the Company, including the Company's Annual
Reports to Stockholders and Annual Reports on Form 10-K for the fiscal years
ended September 30, 1990, through September 30, 1994, and the Company's
Quarterly Reports on Form 10-Q for the periods ended September 30, 1990,
through March 31, 1995, (ix) reviewed certain operating and financial
information, including internal projections and forecasts, and other data
provided to it by the Company's management relating to the Company's business
and prospects, (x) held discussions with the Company's management regarding the
Company's business, prospects and strategic objectives, and (xi) conducted such
other financial studies, analyses, inquiries and investigations as it deemed
appropriate.     
 
                                       43
<PAGE>
 
   
  In connection with its valuations of the Company, Houlihan Lokey utilized the
following methodologies: (i) asset valuation analysis; (ii) analysis based upon
capitalization of 1993 net operating cash flow; and (iii) consolidated cash
flow analysis.     
     
  .  Asset Valuation. First, instead of valuing each asset on an individual
     basis, Houlihan Lokey classified the Company's assets according to a
     general risk-based classification (i.e., stable, long-term equity
     investment or high risk loan in foreclosure proceedings, etc.). The risk
     levels were not quantifiably defined, and the risk classifications
     determined were largely based on issues unique to a distressed
     commercial loan portfolio. Then, with respect to each class of assets,
     Houlihan Lokey applied selected discount rates and terminal
     capitalization rates to the projected cash flows. Thus, the projected
     cash flows of all assets within a particular classification were
     present-valued using the same discount and capitalization rates. The
     discount and capitalization rates were based solely on risk
     classification and were not adjusted for property type, location or
     other characteristic. The discount and capitalization rates were
     determined by researching such rates as announced in various
     publications, and compiling information off of Houlihan Lokey's
     databases, queries with third-party real estate professionals and
     analysis of interest rates, public company market capitalization
     multiples and other indications of rates of return on investments.
     Finally, the third-party secured debt and capitalized, 1993 corporate
     administrative expenses were subtracted from the sum of the discounted
     cash flows of each risk class.     
     
  .  Capitalization of 1993 Net Operating Cash Flow. In this analysis,
     Houlihan Lokey valued the Company's restructure value by applying a
     range of capitalization rates to the 1993 net operating cash flow (net
     of corporate administrative expenses). The capitalization rates applied
     in this analysis were determined by researching such rates as announced
     in various publications, and compiling information off of Houlihan
     Lokey's databases, queries with third-party real estate professionals
     and analysis of interest rates, public company market capitalization
     multiples and other indications of rates of return on investments. This
     analysis used a single capitalization rate on the Company's overall net
     operating cash flow and therefore, by definition, that rate could not be
     adjusted by property type or location. An analysis was not performed to
     determine capitalization rates for individual properties or risk
     classification except as discussed above.     
     
  .  Consolidated Discounted Cash Flow Analysis. Houlihan Lokey prepared a
     consolidated discounted cash flow analysis utilizing the following
     assumptions: (i) 100% deleveraging; (ii) no external capital infusion;
     (iii) minimum required dividend payments; and (iv) reinvestment of
     available cash (all cash in excess of $5 million) into new real estate
     equities, assuming marginal acquisition leverage at 50%, a net operating
     income hurdle rate of 10%, a 3% capital expenditure reserve of net
     operating income and a net operating income annual growth rate of 4%.
         
BRIEF EXPLANATION OF CHAPTER 11 REORGANIZATION
 
  Chapter 11 of the Bankruptcy Code is the principal reorganization chapter of
the Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize its
business for the benefit of itself and its creditors and shareholders.
Confirmation of a plan of reorganization is the principal objective of a
Chapter 11 case.
 
  In general, a Chapter 11 plan of reorganization (i) divides claims and equity
interests into separate classes, (ii) specifies the property that each class is
to receive under the plan, and (iii) contains other provisions necessary for
the reorganization of the debtor.
 
  A Chapter 11 plan may specify that certain classes of claims or equity
interests are either reinstated or their legal, equitable and contractual
rights are to remain unchanged by the reorganization effectuated by the plan.
Such classes are referred to under the Bankruptcy Code as "unimpaired" and,
because of such treatment, are deemed to accept the plan. Accordingly, it is
not necessary to solicit votes from the holders of claims or equity interests
in such classes.
 
                                       44
<PAGE>
 
   
  All other classes of claims and equity interests are "impaired" claims and
equity interests that are entitled to vote on the plan. As a condition to
confirmation, the Bankruptcy Code generally requires that each impaired class
of claims or equity interests that will receive or retain property under a plan
of reorganization vote to accept the plan of reorganization. In order for a
class to accept a plan, acceptances must be received from (i) the holders of
claims constituting at least two-thirds in dollar amount and more than one-half
in number of the allowed claims in each impaired class of claims that have
voted to accept or reject the plan, and (ii) the holders of at least two-thirds
in amount of the allowed equity interests in each impaired class of equity
interests that have voted to accept or reject the plan.     
 
  A Chapter 11 plan also may specify that certain classes will not receive any
distribution of property. While such classes are impaired, such classes are
deemed to reject the plan and, therefore, need not be solicited to vote to
accept or reject the plan.
 
  If any class or classes of claims or equity interests entitled to vote
rejects the plan, upon request of the plan proponents, the Bankruptcy Court may
nevertheless confirm the plan if, among other things, certain minimum treatment
standards are met with respect to such class or classes. See "--Confirmation of
the Prepackaged Plan--Nonconsensual Confirmation" below.
 
  Chapter 11 of the Bankruptcy Code does not require each holder of a claim or
equity interest to vote in favor of a plan of reorganization in order for the
Bankruptcy Court to confirm the plan. However, the Bankruptcy Court must find
that the plan of reorganization meets a number of statutory tests (other than
the voting requirements described in this section) before it may confirm, or
approve, the plan of reorganization. Many of these tests are designed to
protect the interests of holders of claims or equity interests who do not vote
to accept the plan of reorganization but who will nonetheless be bound by the
plan's provisions if it is confirmed by the Bankruptcy Court. See "--
Confirmation of the Prepackaged Plan--Feasibility Test" and "--Confirmation of
the Prepackaged Plan--Best Interests of Creditors Test; Liquidation Value"
below.
 
CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
   
  Section 1123 of the Bankruptcy Code provides that a plan of reorganization
must classify claims against and equity interests in a debtor. Under section
1122 of the Bankruptcy Code, a plan must classify claims and equity interests
into classes that contain substantially similar claims or interests. The
Prepackaged Plan divides the Claims of known entities that hold on the
Effective Date a Claim against the Company that arose or is deemed to have
arisen before the Petition Date, including a Claim against the Company of kind
specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy Code and known
holders of Interests into classes and sets forth the treatment offered each
class. The Company believes it has classified all Claims and Interests in
compliance with the provisions of section 1122, but once a Chapter 11 case has
been commenced, it is possible that a holder of a Claim or Interest may
challenge the Company's classification of Claims and Interests and that the
Bankruptcy Court may find that a different classification is required for the
Prepackaged Plan to be confirmed. In such event, it is the present intention of
the Company, to the extent permitted by the Bankruptcy Code and the provisions
of the Prepackaged Plan, to amend or revoke such plan and file an amended or
different plan that would make modifications of the classification of Claims or
Interests that are required by the Bankruptcy Court for confirmation.     
 
  Only classes that are impaired under the Prepackaged Plan are entitled to
vote to accept or reject the Prepackaged Plan. See "The Plan Solicitation;
Voting Procedures."
 
                                       45
<PAGE>
 
  Claims and Interests are classified for all purposes including voting,
confirmation and distribution pursuant to the Prepackaged Plan, as follows:
 
      Class 1--Priority Claims
      Class 2--Claims of Holders of Outstanding Notes (Impaired)
      Class 3--Other Secured Claims (Impaired)
      Class 4--Unsecured Claims (Impaired)
      Class 5--Interests of Holders of Outstanding Common Shares
      (Impaired)
      Class 6--Interests of Holders of Outstanding Stock Rights
   
  Only Claims and Interests that are not in dispute, are not contingent, are
not unliquidated in amount and are not subject to a pending objection or
estimation proceeding (respectively, "Allowed Claims" and "Allowed Interests")
are entitled to receive distributions under the Prepackaged Plan. The following
describes the Prepackaged Plan's classification of Claims against and Interests
in the Company and the treatment that holders of Allowed Claims and Allowed
Interests will receive for such Allowed Claims and Allowed Interests under the
Prepackaged Plan if it is confirmed, unless such holders were to agree to
accept less favorable treatment by settlement or otherwise.     
 
  Such treatment will be in full satisfaction, release and discharge of such
holder's respective Claims against or Interests in the Company, except as
provided in the Prepackaged Plan. The following summary of proposed
distributions under the Prepackaged Plan does not purport to be complete and is
subject to and qualified in its entirety by, the Prepackaged Plan.
   
  (1) Administrative Claims. "Administrative Claims" are Claims for costs and
expenses of administration allowed under section 503(b) of the Bankruptcy Code
and referred to in section 507(a)(1) of the Bankruptcy Code, including, without
limitation, (a) the actual and necessary costs and expenses incurred after the
Petition Date of preserving the estate created by the commencement of the
Reorganization Case under section 541 of the Bankruptcy Code (the "Estate") and
operating the business of the Company (such as wages, salaries or commissions
for services and payments for goods), (b) compensation for legal, financial
advisory, accounting and other services and reimbursement of expenses awarded
or allowed under section 330 of the Bankruptcy Code, and (c) all fees and
charges assessed against the Estate under 28 U.S.C. (S) 1930.     
   
  In general, subject to the bar date provisions contained in the Prepackaged
Plan, the Company or any successor thereto by merger, consolidation or
otherwise, from and after the Effective Date (the "Reorganized Debtor") will
pay to each holder of an Administrative Claim, on account of the Administrative
Claim and in full satisfaction thereof, cash equal to the amount of such
Administrative Claim, unless the holder agrees or will have agreed to other
less favorable treatment of such Claim. Except as otherwise provided in the
Prepackaged Plan, payment on an Administrative Claim will be made on the later
of (a) the Effective Date, and (b) the date such payment would have become due
under the terms of such Claim in the absence of the Reorganization Case.     
 
  All payments to professionals for compensation and reimbursement of expenses
and all payments to reimburse expenses of members of any official committee
appointed in the Reorganization Case will be made in accordance with the
procedures established by the Bankruptcy Code and the Bankruptcy Rules relating
to the payment of interim and final compensation and expenses and in accordance
with any order of the Bankruptcy Court. The Bankruptcy Court will review and
determine all requests for compensation and reimbursement of expenses.
   
  Assuming that there is no significant litigation initiated or objection filed
with respect to the Prepackaged Plan, the Company estimates that its
Administrative Claims payable to professional persons and service providers
will, in the aggregate, not exceed $250,000.00.     
 
                                       46
<PAGE>
 
  In addition to the foregoing, section 503(b) of the Bankruptcy Code provides
for the payment of compensation to creditors, indenture trustees and other
persons making a "substantial contribution" to a Chapter 11 case and to
attorneys for, and other professional advisors to, such persons. Certain
entities may file applications with the Bankruptcy Court for allowances of
compensation and reimbursement of expenses for substantial contribution. The
amounts that such entities may seek for such compensation cannot be estimated
by the Company at this time. The Company is presently unaware of any entities
that may seek compensation under the substantial contribution doctrine.
Requests for compensation and reimbursement of expenses under this substantial
contribution doctrine must be approved by the Bankruptcy Court after a hearing
on notice at which the Company and other parties in interest may participate,
and, if appropriate, object to the allowance of any compensation and
reimbursement of expenses.
   
  (2) Class 1: Priority Claims. (a) Section 507(a)(8) Priority Claims. Certain
Claims for unpaid taxes are entitled to priority in right of payment under
section 507(a)(8) of the Bankruptcy Code ("Priority Tax Claims"). Pursuant to
the Prepackaged Plan, unless the applicable taxing agency agrees to less
favorable treatment, the Reorganized Debtor will pay to each holder of a
Priority Tax Claim that is also an Allowed Claim deferred cash payments, over a
period not exceeding six years from the date of assessment of such Claim, in an
aggregate amount equal to the amount of such Allowed Claim, plus interest from
the Effective Date on the unpaid portion of such Allowed Claim (without penalty
of any kind) at the rate prescribed below. The payment of the amount of each
such Allowed Claim will be made in equal semiannual installments due on the
latest of (i) the Effective Date, (ii) 30 calendar days after the date on which
an order allowing such Claim becomes a Final Order (as defined below), and
(iii) such other time or times as may be agreed to by the holder of such Claim
and the Reorganized Debtor. Each installment will include simple interest on
the unpaid portion of such Allowed Claim, without penalty of any kind, at the
statutory rate of interest provided for such taxes under applicable
nonbankruptcy law; provided, however, that the Reorganized Debtor will have the
right to pay any Priority Tax Claim that is also an Allowed Claim, or any
remaining balance of such Claim, in full, at any time on or after the Effective
Date, without premium or penalty of any kind. The Company estimates that there
will be no Priority Tax Claims that are also Allowed Claims. "Final Order"
means an order or judgment of the Bankruptcy Court or other court of competent
jurisdiction as to which the time to appeal, seek leave to appeal, petition for
certiorari or move for reargument or rehearing has expired and as to which no
appeal, petition for certiorari or other proceedings for reargument, rehearing
or leave to appeal shall have been waived in writing in form and substance
satisfactory to the Company or the Reorganized Debtor or, in the event that an
appeal, writ of certiorari, or reargument or rehearing thereof or leave to
appeal has been motioned for or sought, such order of the court shall have been
affirmed by the highest court to which such order was appealed, or certiorari
has been denied or from which reargument or rehearing or leave to appeal was
motioned for or sought, and the time to take any further appeal, petition for
certiorari, move for reargument or rehearing or seek leave to appeal shall have
expired.     
   
  (b) Other Priority Claims. Certain Claims are entitled to a priority in right
of payment pursuant to sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of
the Bankruptcy Code ("Other Priority Claims"). Examples of Claims of this type
include, without limitation, (i) unsecured Claims for accrued employee
compensation, including vacation, severance and sick-leave pay payable in
accordance with the Company's existing compensation procedures, earned within
90 days prior to the commencement of the Reorganization Case, to the extent of
$4,000 per employee, and (ii) contributions to employee benefit plans arising
from services rendered within the 180 days prior to the commencement of the
Reorganization Case, but only to the extent of (A) the number of employees
covered by such plans multiplied by $4,000, less (B) the aggregate amount paid
to such employees for accrued employee compensation. The Company intends to ask
the Bankruptcy Court for authorization to pay all pre-petition employee
compensation and benefits on a current basis. To the extent not previously
paid, each holder of a Priority Claim (as defined below) that is also an
Allowed Claim will be paid the full amount of such Priority Claim in cash on
the Effective Date (or as soon as practicable after the date on which any such
Claim is allowed if the date of allowance is later than the Effective Date).
The Company estimates that there will be no Priority Claims that are also
Allowed Claims. "Priorty Claim" means any Claim, other than an Administrative
Claim, of a Creditor to the extent such Claim is entitled to priority under
section 507(a) of the Bankruptcy Code.     
 
                                       47
<PAGE>
 
   
  (3) Class 2: Outstanding Notes. Class 2 consists of all Claims under or
evidenced by the Outstanding Notes, the Outstanding Note Indenture, the
Outstanding Collateral Agreement, or any document, instrument or agreement
delivered in connection therewith. The holders of a majority of the Outstanding
Notes have elected, pursuant to section 1111(b)(2) of the Bankruptcy Code, to
treat their entire Claim as secured by the collateral under the Outstanding
Collateral Agreement. Pursuant to the Prepackaged Plan, the Reorganized Debtor
will distribute to each holder of Class 2 Claims that are also Allowed Claims
(other than the Class 2 Expense Claims (as hereinafter defined), which will be
treated as described below) its pro rata share of (i) $110,000,000 in principal
amount of New Senior Notes, (ii) cash in an amount not less than $50,000,000
(minus any amounts paid to the holders of the Outstanding Notes between March
1, 1995, and the Petition Date pursuant to the Agreement of Understanding),
held by the Reorganized Debtor on the Effective Date, in excess of cash in an
amount not to exceed $10,000,000, for use by the Reorganized Debtor in its
business operations (the "Initial Cash Reserve Fund"), and (iii) approximately
10,890,180 New Common Shares (which will represent 97% of the Common Shares
outstanding on the Effective Date if the Prepackaged Plan is accepted by
holders of Outstanding Common Shares)(Class 5)). By way of example, the holders
of Class 2 Claims that are also Allowed Claims will receive their pro rata
portion of the foregoing consideration for each $10,000 in principal amount of
Outstanding Notes (subject to rounding for fractional interests):     
 
      New Senior Notes           $3,793 in principal amount
 
      Cash                          
                                 $1,725 (assuming $50 million is distributed
                                 in the aggregate)     
 
      New Common Shares          375.5 shares
   
  If holders of Outstanding Common Shares do not vote to accept the Prepackaged
Plan, then all Outstanding Common Shares will be cancelled, and holders of
Outstanding Notes will receive New Common Shares which will represent 99.5% of
the Common Shares outstanding on the Effective Date with 0.5% of the New Common
Shares to be distributed to charities designated by the Principal Holders.     
   
  The Company estimates that Class 2 Claims that are also Allowed Claims will
not exceed $355 million.     
   
  On the Effective Date or as soon thereafter as is practicable, each holder of
a Class 2 Claim that is also an Allowed Claim receiving 5% or more of the New
Common Shares or New Senior Notes will be entitled to enter into the
Registration Rights Agreement between the Company and each such holder relating
to the New Securities (the "Registration Rights Agreement").     
   
  The Reorganized Debtor will pay to the applicable party entitled to payment
an amount equal to the amount of any unpaid fees and reasonable unpaid out-of-
pocket costs or expenses earned or incurred through the Effective Date by the
Outstanding Indenture Trustee (as hereinafter defined) or the Principal
Holders, including, without limitation, reasonable out-of-pocket costs and
expenses and reasonable fees of legal counsel to the Outstanding Indenture
Trustee and the attorneys for the Principal Holders (the "Class 2 Expense
Claims"). Payment of such Class 2 Expense Claims will constitute distributions
on account of Allowed Claims in Class 2, in addition to the distributions
provided for such Class as described above and distributions otherwise provided
under the Prepackaged Plan to holders of Class 2 Claims that are also Allowed
Claims will not be reduced on account of such payment of Class 2 Expense
Claims. Notwithstanding anything to the contrary, the Reorganized Debtor's
obligation to pay Class 2 Expense Claims will be subject to the same bar date
and procedural provisions set forth in the Prepackaged Plan for Administrative
Claims and the procedures regarding resolution of contested Claims and
Interests set forth in the Prepackaged Plan. Amounts payable to the Outstanding
Indenture Trustee are subject to approval of the Bankruptcy Court pursuant to
section 1129(a)(4). The Company estimates that Class 2 Expense Claims will not
exceed $100,000, of which not more than $10,000 is estimated to represent fees
payable to the Outstanding Indenture Trustee.     
   
  The terms and conditions of the New Senior Notes, including terms and
conditions governing payment of principal and interest, covenants of the
Company and rights and remedies of the holders, are set forth in, and will be
governed by, an Amended and Restated Indenture (the "New Senior Note
Indenture"). See     
 
                                       48
<PAGE>
 
"Description of New Senior Notes." The terms and conditions of the New Common
Shares, including terms and conditions governing payment of dividends and
voting, will be governed by the Amended and Restated Declaration of Trust as
effected pursuant to the Prepackaged Plan. See "Description of Capital Stock."
   
  (4) Class 3: Other Secured Claims. This class consists of all Claims, other
than Claims of a holder of Outstanding Notes or any Class 2 Expense Claims, of
a Creditor secured by a lien on property of the Estate, to the extent of the
value, as determined by the Bankruptcy Court pursuant to section 506(a) of the
Bankruptcy Code, of such Creditor's interest in such property of the Estate. To
the extent not previously paid, all Other Secured Claims that are also Allowed
Claims will be (at the option of the Reorganized Debtor and with the consent of
the Principal Holders) (a) paid in full, in cash, on the Effective Date (or as
soon as practicable after the date on which any such Claim is allowed), (b)
paid upon such other less favorable terms as may be mutually agreed upon by the
Reorganized Debtor and the holders of such Claims, or (c) reinstated and paid
or performed by the Reorganized Debtor in accordance with section 1124 of the
Bankruptcy Code, or the legal, equitable and contractual rights to which such
Claim entitles the holder of such Claim will be left unaltered. The Company
estimates that there will be no Class 3 Claims that are also Allowed Claims.
       
  (5) Class 4: Unsecured Claims. This class consists of any Claim that is not
an Administrative Claim, a Priority Claim, a Claim under or evidenced by the
Outstanding Notes, the Outstanding Note Indenture, the Outstanding Collateral
Agreement, the Prior Plan, an Other Secured Claim, or a Claim based upon the
Outstanding Common Shares or Outstanding Stock Rights (as hereinafter defined).
Each holder of a Class 4 Claim will receive as of the Effective Date, or as
soon thereafter as the Claim becomes an Allowed Claim, whichever is later, cash
equal to the amount of such Allowed Claim unless the holder of such Claim
agrees to less favorable treatment. The Company may ask the Bankruptcy Court
for authorization to pay some or all Unsecured Claims that are also Allowed
Claims on a current basis. The Company estimates that Class 4 Claims that are
also Allowed Claims will not exceed $25,000.     
   
  (6) Class 5: Outstanding Common Shares. This class consists of all Interests
of holders of Outstanding Common Shares. If holders of Class 5 Interests that
are also Allowed Interests vote to accept the Prepackaged Plan, holders of
Outstanding Common Shares will retain their existing Common Shares, subject to
the Reverse Stock Split and the issuance of New Common Shares to holders of
Class 2 Claims that are also Allowed Claims after which such holders will hold
shares representing 3% of the aggregate of the Common Shares outstanding on the
Effective Date. If holders of Outstanding Common Shares do not vote to accept
the Prepackaged Plan, all Outstanding Common Shares will be cancelled and all
holders of Interests in Class 5 will receive or retain no property under the
Prepackaged Plan on account of such Interests.     
   
  (7) Class 6: Outstanding Stock Rights. This class consists of any right to
purchase or otherwise acquire Common Shares of the Company, and any stock
appreciation or similar rights relating to Common Shares of the Company,
existing prior to the Effective Date ("Outstanding Stock Rights"). Outstanding
Stock Rights do not include any rights arising solely out of the ownership of
the Outstanding Common Shares. The Outstanding Stock Rights will be cancelled
under the Prepackaged Plan. No distributions will be made to holders of
Outstanding Stock Rights under the Prepackaged Plan. All Claims or Interests in
Class 6 will not receive or retain any property under the Prepackaged Plan on
account of such Claims or Interests.     
 
SUMMARY OF OTHER PROVISIONS OF THE PREPACKAGED PLAN
   
  Officers and Trustees. As of the Effective Date, the Principal Holders and
the New Major Holder have agreed among themselves that the initial members of
the Board of Trustees of the Reorganized Debtor will consist of seven members,
including (a) the new President and Chief Executive Officer of the Reorganized
Debtor, (b) one member selected by the New Major Holder, and (c) five members
selected by the Principal Holders. See "Management" for information regarding
the new President and Chief Executive Officer and new Board of Trustees. Such
persons will be deemed elected to the Board of Trustees, and such elections
will be deemed effective as of the Effective Date, without any requirement of
further action by shareholders or trustees of the Company or the Reorganized
Debtor. The persons identified as officers of the Reorganized     
 
                                       49
<PAGE>
 
Debtor under the caption "Management" will serve as the initial officers of the
Reorganized Debtor as of the Effective Date, however it is anticipated that the
new Board of Trustees may replace one or more officers in addition to its
selection of the new President and Chief Executive Officer. Subject to any
requirement of Bankruptcy Court approval under section 1129(a)(5) of the
Bankruptcy Code, those persons designated as trustees and officers of the
Reorganized Debtor will assume their offices as of the Effective Date and will
continue to serve in such capacities thereafter, pending further action of the
Board of Trustees or shareholders of the Reorganized Debtor in accordance with
the Amended and Restated Declaration of Trust, the Reorganized Debtor's bylaws
and applicable state law.
 
  Prior to the confirmation of the Prepackaged Plan, in accordance with section
1129(a)(5) of the Bankruptcy Code, the Company will disclose the identity of
any other insider that will be employed or retained by the Company and the
nature of any compensation for such insider.
   
  Executory Contracts and Leases. Unless previously assumed or rejected by
order of the Bankruptcy Court pursuant to section 365 of the Bankruptcy Code,
as of the Effective Date, the Reorganized Debtor will assume each of the
executory contracts and leases of the Company that are not rejected as set
forth in the second succeeding paragraph and each of the executory contracts
and unexpired leases which are identified in the Schedule of Assumed Executory
Contracts and Unexpired Leases which is Exhibit E to the Prepackaged Plan. The
Company reserves the right at any time prior to the hearing on Confirmation,
with the consent of the Principal Holders, to amend Exhibit E either to (a)
delete any executory contract or lease listed therein and provide for its
rejection pursuant to the Prepackaged Plan or (b) add any executory contract or
lease to Exhibit E, thus providing for its assumption (or assumption and
assignment) pursuant to the Prepackaged Plan. The Company will provide notice
of any amendment to Exhibit E to the parties to the executory contract or lease
affected thereby. The order of the Bankruptcy Court confirming the Prepackaged
Plan pursuant to section 1129 of the Bankruptcy Code (the "Confirmation Order")
will constitute an order of the Bankruptcy Court approving all such assumptions
described in the Prepackaged Plan, pursuant to section 365 of the Bankruptcy
Code, as of the Effective Date.     
   
  Any monetary defaults under an executory contract or lease to be assumed
under the Prepackaged Plan will be satisfied, pursuant to section 365(b)(1) of
the Bankruptcy Code in either of the following ways: (1) by payment of the
default amount in cash on the Effective Date, or (2) by payment of the default
amount on such other terms as agreed to by the Reorganized Debtor and the other
parties to such executory contract or lease. In the event of a dispute
regarding (i) the amount of any cure payments, (ii) the ability of the
Reorganized Debtor to provide adequate assurance of future performance under
the contract or lease to be assumed, or (iii) any other matter pertaining to
assumption (or assumption and assignment) of the contract or lease to be
assumed, the cure payments required by section 365(b)(1) of the Bankruptcy Code
will be made following the entry of a Final Order by the Bankruptcy Court
resolving the dispute and approving assumption.     
   
  Unless previously assumed or rejected by order of the Bankruptcy Court
pursuant to section 365 of the Bankruptcy Code, on the Effective Date, all
documents, agreements, contracts and leases listed on the Schedule of Rejected
Executory Contracts and Unexpired Leases, which is Exhibit F to the Prepackaged
Plan, will be rejected, to the extent, if any, that any of the foregoing
constitute executory contracts or unexpired leases, and without conceding or
admitting that they constitute executory contracts or unexpired leases or that
the Company has any liability thereunder. The Company reserves the right at any
time prior to the Confirmation Date with the consent of the Principal Holders,
to amend Exhibit F either to (a) delete any contract or lease listed therein
and provide for its assumption pursuant the Prepackaged Plan, or (b) add any
contract or lease to Exhibit F, thus providing for its rejection pursuant to
the Prepackaged Plan. The Company will provide notice of any amendment of
Exhibit F to the parties to the contract or lease affected thereby.     
 
                                       50
<PAGE>
 
   
  The Confirmation Order will constitute an order of the Bankruptcy Court
approving all such rejections, pursuant to section 365 of the Bankruptcy Code,
as of the Effective Date. Any Claim for damages arising from the rejection
under the Prepackaged Plan of an executory contract or unexpired lease must be
filed within 30 days after the mailing of notice of Confirmation or be forever
barred and unenforceable against the Company, its Estate, the Reorganized
Debtor and its properties and barred from receiving any distribution under the
Prepackaged Plan on account of such Claim.     
          
  Releases. In consideration for the distributions to be made under the
Prepackaged Plan and the releases provided for therein, and in order to protect
the Reorganized Debtor from Claims for contribution or indemnity relating to
pre-Effective Date acts or omissions, as of the Effective Date, (i) the
Creditors' Committee, each holder of a Claim or Interest, and each of the
officers, directors, employees, members and professionals of such committee or
holder, will be released from any Released Claims that the Company may have
against any of them (the "Debtor Release"), (ii) the Company, the Reorganized
Debtor, the Creditors' Committee, the Principal Holders and their respective
officers, directors, employees, members and professionals (collectively, the
"Debtor Releasees") will be released from any Released Claims that any holder
of a Claim or Interest may have against any of the Debtor Releasees, and (iii)
the Debtor Releasees also will be released from any and all actions, causes of
action, claims, liabilities, demands and obligations of any kind or nature
whatsoever that the Company, the Reorganized Debtor, the Company's Estate or
any holder of a Claim or Interest may have against any of the Debtor Releasees
that is based upon or that arises out of any alleged act or omission by any of
the Debtor Releasees that is related to the Company, including, without
limitation, the Reorganization Case, the Outstanding Notes, the Outstanding
Collateral Agreement, the Prior Plan, the Outstanding Common Shares, the
Outstanding Stock Rights or any of the Claims or Interests in the
Reorganization Case and any Claims under the federal securities laws, provided,
however, such release shall not apply to Excluded Claims (as defined below)
against the Company (the release described in subparagraphs (ii) and (iii)
above is hereinafter referred to as the "Creditor/Shareholder Release") and no
holder of a Claim shall be released until such Claim is allowed.     
   
  Notwithstanding the foregoing, to the extent that a holder of a Claim or
Interest elects not to grant a Creditor/Shareholder Release and receive a
Debtor Release, such holder may make such election by indicating its election
to opt out of such releases in the space provided for such election on the
Ballot for accepting or rejecting the Prepackaged Plan. If a holder makes such
election, the Creditor/Shareholder Release will not be enforceable against such
holder, and such holder will not be released under the Debtor Release.
"Excluded Claims" mean any obligation that arises under the Prepackaged Plan or
any document, instrument or agreement to be executed, delivered or assumed
under the Prepackaged Plan, including without limitation, the obligations of
the Reorganized Debtor under the New Senior Notes, the New Senior Note
Indenture, the New Collateral Documents (as hereinafter defined) and all
documents, instruments and agreements delivered or to be delivered in
connection therewith (the "Excluded Claims").     
          
  Conditions to Effectiveness. The following are conditions to the
effectiveness of the Prepackaged Plan: (i) the Prepackaged Plan has been
accepted by the requisite holders of Claims in Class 2 pursuant to section 1126
of the Bankruptcy Code; (ii) the clerk of the Bankruptcy Court has entered the
Confirmation Order, in form and substance satisfactory to the Company and to
the Principal Holders and (unless otherwise agreed to by the Principal Holders)
such order has become a Final Order; (iii) no court will have entered an order
modifying or staying the enforcement of the Confirmation Order or such order
shall have been vacated; (iv) the New Senior Note Indenture will have been
qualified under the Trust Indenture Act of 1939, as amended, and no stop order
shall have been issued with respect thereto; (v) the New Senior Note Indenture
and the New Collateral Documents will have been executed and delivered by the
Reorganized Debtor and each of its subsidiaries, and the New Indenture Trustee;
and (vi) all other material documents, instruments or agreements including,
including without limitation, the Amended and Restated Declaration of Trust
shall have been executed and delivered by the parties thereto and shall have
become effective.     
 
                                       51
<PAGE>
 
MEANS FOR IMPLEMENTATION OF THE PREPACKAGED PLAN
   
  The Effective Date of the Prepackaged Plan shall be a business day selected
by the Debtor (i) that is at least 11 calendar days after the Confirmation Date
or, with the consent of the Principal Holders, at least one business day after
the Confirmation Date, if the Bankruptcy Court enters an order making
Bankruptcy Rule 7062 inapplicable to the proceedings respecting the
Confirmation Order or otherwise determining that the Effective Date may occur
immediately following the Confirmation Date, and (ii) on which (a) no stay of
the Confirmation Order is in effect, and (b) all conditions to the Effective
Date set forth in the Prepackaged Plan have been satisfied or waived pursuant
to the Prepackaged Plan. On the Effective Date, the Prepackaged Plan will be
implemented by the Company as described below.     
          
  Objections to Claims or Interests and Prosecution of Disputed Claims. Except
as otherwise provided, applications of professionals for compensation and
reimbursement of expenses under the Prepackaged Plan, and except as otherwise
ordered by the Bankruptcy Court after notice and a hearing, objections to
Claims or Interests, including Administrative Claims, or to requests for
payment of Class 2 Expense Claims, shall be filed and served upon the holder of
such Claim or upon the Wilmington Trust Company, as trustee under the
Outstanding Note Indenture or any predecessor or successor trustee (the
"Outstanding Indenture Trustee"), or other relevant party as applicable, not
later than the later of (i) 90 days after the Effective Date, and (ii) 90 days
after a proof of Claim or Interest or request for payment of such Claim,
Interest, Administrative Claim or Class 2 Expense Claims is filed, unless this
period is extended by the Bankruptcy Court. After the Effective Date, the
Reorganized Debtor shall have the exclusive right to object to Claims,
Interests or Class 2 Expense Claims.     
   
  Notwithstanding any other provisions in the Prepackaged Plan, no payments or
distributions, if any, will be made on account of a Claim or Interest until
such Claim or Interest becomes an Allowed Claim or Allowed Interest. With
respect to any Disputed Claim (as hereinafter defined) or Disputed Interest (as
hereinafter defined) that becomes an Allowed Claim or Allowed Interest, all
payments due or distributions on account of such Claim or Interest that becomes
an Allowed Claim or Allowed Interest shall be made pursuant to the Prepackaged
Plan as soon as practicable after the date on which such Claim or Interest
becomes an Allowed Claim or Allowed Interest. See "--Distributions" below.     
   
  Distributions. Subject to the provisions of the Prepackaged Plan described
below, and except as otherwise provided in the Prepackaged Plan, property to be
distributed under the Prepackaged Plan to an impaired class (i) will be
distributed on or as soon as practicable after the Effective Date to each
holder of an Allowed Claim or an Allowed Interest of that class that is an
Allowed Claim or Allowed Interest as of the Effective Date, and (ii) will be
distributed to each holder of an Allowed Claim or an Allowed Interest of that
class that is allowed after the Effective Date, to the extent allowed, as soon
as practicable after such Claim or Interest becomes an Allowed Claim or Allowed
Interest. Property to be distributed under the Prepackaged Plan to a class that
is not impaired or on account of a Claim of a kind described in Bankruptcy Code
section 507(a)(1) or Class 2 Expense Claims will be distributed on the later of
(i) the later of the two dates specified in the preceding sentence, and (ii)
the date on which the distribution to the holder of the Allowed Claim would
have been due and payable under the terms of the Allowed Claim in the absence
of the Reorganization Case.     
          
  Holders of Outstanding Securities Entitled to Receive Distribution. Any
distribution under the Prepackaged Plan on account of an Allowed Claim under or
evidenced by Outstanding Notes will be made to the holders of record of such
Outstanding Notes as of the Effective Date. At the close of business on the
Effective Date, the transfer ledgers for the Outstanding Securities will be
closed, and there will be no further changes in the record holders of the
Outstanding Notes. The Company, the Reorganized Debtor and the Outstanding
Indenture Trustee will have no obligation to recognize any transfer of the
Outstanding Notes occurring on or after the Effective Date. The Company, the
Reorganized Debtor and the Outstanding Indenture Trustee will be entitled
instead to recognize and deal for all purposes hereunder with only those record
holders stated on the transfer ledgers for the Outstanding Notes, as of the
close of business on the Effective Date.     
 
                                       52
<PAGE>
 
          
  Cancellation of Outstanding Securities and Related Agreements. Except as
expressly provided in the Prepackaged Plan or in the Confirmation Order, on the
Effective Date, the Outstanding Notes, the Outstanding Note Indenture, the
Outstanding Collateral Agreement, those certain pledge agreements executed in
connection with the Outstanding Note Indenture (the "Outstanding Pledge
Agreement"), the Prior Plan, the Outstanding Stock Rights, and all obligations
of the Company under any of the foregoing will be terminated and cancelled.
    
          
  New Securities and Indenture. On or before the Effective Date, the
Reorganized Debtor, the New Indenture Trustee and Wilmington Trust Company and
William J. Wade, as collateral agent under the New Collateral Documents (the
"New Collateral Agent") will have executed the New Senior Note Indenture and
the New Collateral Documents, as applicable. On the Effective Date or as soon
as practicable thereafter, the Reorganized Debtor and each holder of Allowed
Class 2 Claims receiving 5% or more of the New Common Shares or of the New
Senior Notes will be entitled to execute and deliver the Registration Rights
Agreement. All of the documents described in this paragraph will become
effective and binding on the Reorganized Debtor on and as of the Effective
Date. On and after the Effective Date, the Reorganized Debtor will issue the
New Securities in accordance with the Prepackaged Plan.     
          
  Amended and Restated Declaration of Trust; Reverse Stock Split and
Indemnification. To effect the Reverse Stock Split and certain other changes to
the Company's Declaration of Trust, on the Effective Date, the Amended and
Restated Declaration of Trust (which is attached hereto as Annex B) will be
filed with the State Department of Assessments and Taxation of Maryland.
Pursuant to the Amended and Restated Declaration of Trust, each 33.33
Outstanding Common Shares will be automatically converted into one Common Share
and the authorized number of Common Shares will be 20,000,000. See "Description
of Capital Stock." No fractional shares of Common Shares shall be issued upon
such conversion, but in lieu thereof, fractions of 1/2 or greater shall be
rounded to the next greater whole number and fractions of less than 1/2 shall
be rounded to the next lower whole number. No consideration will be paid in
respect of such fractional interests that are rounded down. The Amended and
Restated Declaration of Trust will continue to prohibit the issuance of
nonvoting equity securities to the extent required by section 1123(a)(6) of the
Bankruptcy Code. In addition, certain restrictions on transfer will be included
in the Amended and Restated Declaration of Trust. See "Description of Capital
Stock." Pursuant to the Amended and Restated Declaration of Trust and other
relevant agreements, and notwithstanding any other term or provision of the
Prepackaged Plan to the contrary, the Company will indemnify and hold harmless
its current and former officers, trustees and employees to the fullest extent
permitted by applicable law with respect to any such officer's, trustee's or
employee's acts, conduct and omissions whether arising before or after the
Petition Date. The Amended and Restated Declaration of Trust will become
effective upon (i) confirmation of the Prepackaged Plan, (ii) the occurrence of
the Effective Date and (iii) the filing with the State Department of
Assessments and Taxation of Maryland of the Amended and Restated Declaration of
Trust.     
          
  Disbursing Agent. The Reorganized Debtor, or such other entity or entities as
the Reorganized Debtor may employ (the "Disbursing Agents"), subject to the
reasonable consent of the Principal Holders, will make all distributions
required under the Prepackaged Plan. Any Disbursing Agent may employ or
contract with other entities to assist in or perform the distribution of
property under the Prepackaged Plan. Unless otherwise determined by the
Reorganized Debtor, each Disbursing Agent will serve without bond. Each third
party Disbursing Agent will receive, without further Bankruptcy Court approval,
reasonable compensation for distribution services rendered pursuant to the
Prepackaged Plan and reimbursement of reasonable out-of-pocket expenses
incurred in connection with such services from the Reorganized Debtor on terms
agreed to with the Reorganized Debtor.     
          
  Disputed Claims or Interests. Notwithstanding any other provisions of the
Prepackaged Plan, no payments or distributions will be made on account of any
Disputed Claim (as defined below) or Disputed Interest (as defined below) until
such Claim or Interest becomes an Allowed Claim or Allowed Interest, and then
only to the extent that it becomes an Allowed Claim or Allowed Interest.
"Disputed Claim" or "Disputed Interest" means a Claim or Interest as to which a
proof of Claim or Interest, as applicable, (i) has     
 
                                       53
<PAGE>
 
   
been filed or deemed filed under applicable law, or by reason of an order of
the Bankruptcy Court, but as to which an objection has been or may be timely
filed and which objection, if timely filed, has not been withdrawn on or before
any date fixed for filing such objections by the Prepackaged Plan or order of
the Bankruptcy Court and has not been overruled or denied by a final order, or
(ii) has not been timely filed, if such proof of Claim or Interest was required
to be filed. Prior to the time that an objection has been or may be deemed
timely filed, a Claim or Interest shall be considered a Disputed Claim or
Disputed Interest, as applicable, in its entirety if (i) the amount of the
Claim or Interest specified in the proof of Claim or Interest exceeds the
amount of any corresponding Claim or Interest scheduled by the Company in its
schedules or its list of equity security holders, as applicable, (ii) any
corresponding Claim or Interest scheduled by the Company in its schedules or
its list of equity security holders, as applicable, has been scheduled as
disputed, contingent or unliquidated, irrespective of the amount scheduled, or
(iii) no corresponding Claim or Interest has been scheduled by the Company in
its schedules or its list of equity security holders, as applicable.     
          
  Manner of Payment Under the Prepackaged Plan. Cash payments made pursuant to
the Prepackaged Plan will be in U.S. dollars by checks drawn on a domestic bank
selected by the Reorganized Debtor, or by wire transfer from a domestic bank,
at the Reorganized Debtor's option, except that payments made to foreign trade
creditors holding Allowed Claims may be paid, at the option of the Reorganized
Debtor in such funds and by such means as are necessary or customary in a
particular foreign jurisdiction. Distributions of cash pursuant to the
Prepackaged Plan will be made by mail as set forth above or, upon request of a
holder of a Class 2 Claim that is also an Allowed Claim, by wire transfer in
accordance with written instructions received therefrom.     
          
  Surrender of Instruments. As a condition to the receipt of any distribution
under the Prepackaged Plan, (i) each holder of an Outstanding Note will deliver
to the Outstanding Indenture Trustee or its designee such transaction
instructions or other documents of transfer or exchange as the Outstanding
Indenture Trustee requests, and (ii) each holder of a document or instrument of
the Company other than an Outstanding Note will surrender the document or
instrument to the Disbursing Agent or its designee. However, holders of
Outstanding Common Shares are not required to surrender such document or
instrument. Prior to the Effective Date, each holder of a document or
instrument will receive specific instructions regarding the time and manner in
which the document or instrument is to be surrendered or delivered. Immediately
upon the Effective Date and until such surrender or delivery, such document or
instrument will be deemed cancelled and represent only the right to receive the
distributions to which the holder is entitled under the Prepackaged Plan.     
   
  Any bond, debenture, share of stock, other security or note, whether or not a
security (collectively, the "Instruments"), or transaction instruction, that is
lost, stolen, mutilated or destroyed will be deemed surrendered when the holder
of a Claim or Interest based thereon delivers to the Outstanding Indenture
Trustee, or Disbursing Agent or their respective designee, (i) evidence
satisfactory to the Outstanding Indenture Trustee, Disbursing Agent or its
designee of the loss, theft, mutilation or destruction of such Instrument, or
(ii) such security or indemnity as may be required by the Outstanding Indenture
Trustee, Disbursing Agent or its designee to save each of them harmless with
respect thereto.     
 
  Any holder of an Instrument of the Company that fails to surrender or deliver
or be deemed to have surrendered or delivered the Instrument or relevant
transaction instruction or other document within two years after the Effective
Date will be forever barred from receiving any distribution under the
Prepackaged Plan. In such cases, any property held for distribution on account
of a Claim or Interest based on such Instrument will become property of the
Reorganized Debtor, in the manner provided in the Prepackaged Plan for
unclaimed distributions. To the extent that any such property is held by a
Disbursing Agent other than the Reorganized Debtor, such Disbursing Agent will
return such property to the Reorganized Debtor.
          
  Delivery of Distributions and Undeliverable or Unclaimed Distributions.
Except as provided below for undeliverable distributions, distributions to
holders of Allowed Claims and Allowed Interests will be distributed by mail as
follows: (a) except in the case of the holder of an Instrument for which there
is an     
 
                                       54
<PAGE>
 
   
indenture trustee, security registrar or stock transfer agent, (1) to the
addresses set forth on the respective proofs of claim or proofs of interest
filed by such holders, (2) to the addresses set forth in any written notices of
address changes delivered to the Disbursing Agent(s) after the date of any
related proof of claim, or (3) to the address reflected on the Schedule of
Assets and Liabilities filed with the clerk of the Bankruptcy Court in the
Reorganization Case by the Company if no proof of Claim or proof of Interest is
filed and the Disbursing Agent(s) have not received a written notice of a
change of address; and (b) in the case of the holder of an Instrument for which
there is an indenture trustee, security registrar or stock transfer agent, to
the latest mailing address maintained of record by the pertinent indenture
trustee, security registrar or stock transfer agent, or, if no mailing address
is maintained of record, to the pertinent indenture trustee, security registrar
or stock transfer agent. Distribution of cash pursuant to section 3.3.1(a) of
the Prepackaged Plan will be made by mail as set forth above or, upon request
of a holder of a Class 2 Claim that is also an Allowed Claim, by wire transfer
in accordance with written instructions received therefrom.     
 
  If the distribution to the holder of a Claim or Interest is returned to a
Disbursing Agent as undeliverable, no further distribution will be made to such
holder unless and until the Reorganized Debtor or the applicable Disbursing
Agent is notified in writing of such holder's then current address. Except as
provided below, undeliverable distributions will remain in the possession of
the applicable Disbursing Agent until such times as a distribution becomes
deliverable.
 
  Unclaimed cash (including interest, dividends and other consideration, if
any, distributed on or received for undeliverable New Securities) will be held
in trust in a segregated bank account in the name of the applicable Disbursing
Agent, for the benefit of the potential claimants of such funds, and will be
accounted for separately. Such funds will be held in interest-bearing accounts
to the extent practicable and the parties entitled to such funds will be
entitled to any interest earned on such funds. Undeliverable New Securities
will be held in trust for the benefit of the potential claimants of such
securities by the applicable Disbursing Agent in principal amount of notes and
number of shares sufficient to fund the unclaimed amounts of such securities,
and will be accounted for separately.
   
  Within 30 days after the end of each calendar quarter following the Effective
Date, the applicable Disbursing Agents will make distributions of all property
that has become deliverable during the preceding quarter. Each such
distribution will include any dividends, interest payments or other
distributions made on account of the distributed property.     
   
  Any holder of an Allowed Claim or an Allowed Interest who does not assert a
claim for an undeliverable distribution held by a Disbursing Agent within one
year after the Effective Date will no longer have any claim to or interest in
such undeliverable distribution, and will be forever barred from receiving any
distributions under the Prepackaged Plan. In such cases, any property held for
distribution on account of such Allowed Claims or Allowed Interests will be
returned to and/or retained by the Reorganized Debtor, as follows: (1) any cash
will be the property of the Reorganized Debtor, free from any restrictions
thereon; (2) any New Senior Notes will be canceled; and (3) any New Common
Shares reserved for issuance will be held by the Reorganized Debtor as
unrestricted treasury shares. Nothing contained in the Prepackaged Plan will
require the Company, the Reorganized Debtor or any Disbursing Agent to attempt
to locate any holder of an Allowed Claim or an Allowed Interest.     
          
  Compliance With Tax Requirements. In connection with the Prepackaged Plan, to
the extent applicable, each Disbursing Agent will comply with all withholding
and reporting requirements imposed on it by any governmental unit, and all
distributions pursuant to the Prepackaged Plan will be subject to such
withholding and reporting requirements.     
          
  Setoffs. The Reorganized Debtor may, but will not be required to, set off
against any Allowed Claim and the distributions to be made pursuant to the
Prepackaged Plan on account of such Allowed Claim, claims of any nature that
the Company or the Reorganized Debtor may have against the holder of such
Allowed Claim; provided, however, that neither the failure to effect such a
setoff nor the allowance of any Claim against the     
 
                                       55
<PAGE>
 
Company or the Reorganized Debtor will constitute a waiver or release by the
Company or the Reorganized Debtor of any claim that the Company or the
Reorganized Debtor may possess against such holder.
 
MODIFICATION OF THE PREPACKAGED PLAN
 
  Subject to the restrictions on plan of reorganization modifications set forth
in section 1127 of the Bankruptcy Code or as otherwise permitted by law without
additional disclosure pursuant to section 1125 of the Bankruptcy Code, except
as the Bankruptcy Court may otherwise order, the Company, subject to the
approval of the Principal Holders, reserves the right to alter, amend or modify
the Prepackaged Plan before its substantial consummation. The potential impact
of any such amendment, modification or supplement on the holders of Claims and
Interests cannot presently be foreseen, but may include a change in the
economic impact of the Prepackaged Plan on some or all of the classes of Claims
and Interests. If any of the terms of the Prepackaged Plan are amended,
modified or supplemented in a manner determined to constitute a material
adverse change, the Company will promptly disclose any such amendment,
modification or supplement in a manner reasonably calculated to inform the
holders adversely affected thereby, and the Company will extend the Plan
Solicitation period for Ballots and Master Ballots for an appropriate period,
depending upon the significance of the amendment, modification or supplement
and the manner of disclosure to holders of Claims and Interests if the Plan
Solicitation period would otherwise expire during such period.
 
REVOCATION OF THE PREPACKAGED PLAN
   
  Subject to certain limitations contained in the Prepackaged Plan, the Company
reserves the right to revoke and withdraw the Prepackaged Plan at any time and
solely within its discretion prior to the Confirmation Date, with the consent
of the Principal Holders. If the Company revokes or withdraws the Prepackaged
Plan, or if confirmation of the Prepackaged Plan does not occur or if the
Prepackaged Plan does not become effective, then the Prepackaged Plan will be
null and void, and nothing contained in the Prepackaged Plan will: (1)
constitute a waiver or release of any Claims by or against, or any interests
in, the Company; (2) constitute an admission of any fact or legal conclusion by
the Company, the Company as debtor in possession in the reorganization case
(the "Debtor in Possession") or any other individual, corporation, limited
liability company, partnership, association, joint stock company, joint
venture, estate, trust, unincorporated organization, government or any
political subdivision thereof, governmental unit, Creditors' Committee,
unofficial committee of creditors or equity holders or other entity (an
"Entity"); or (3) prejudice in any manner the rights of the Company or the
Debtor in Possession in any further proceedings involving the Company or the
Debtor in Possession.     
 
CONFIRMATION OF THE PREPACKAGED PLAN
 
  If the Requisite Plan Acceptances are received and the Company seeks to
implement the Prepackaged Plan by commencing the Reorganization Case under
Chapter 11 of the Bankruptcy Code, the Company will request that the Bankruptcy
Court hold a confirmation hearing as promptly as practicable, upon such notice
to the parties in interest as is required by the Bankruptcy Code, the
Bankruptcy Rules and the Bankruptcy Court. Parties in interest, including all
holders of Claims and Interests, will receive notice of the date and time fixed
by the Bankruptcy Court for the confirmation hearing. The Bankruptcy Court will
also establish procedures for the filing and service of objections to
confirmation of the Prepackaged Plan.
   
  For the Prepackaged Plan to be confirmed, the Bankruptcy Code requires that
the Bankruptcy Court determine that the Prepackaged Plan complies with the
requirements of section 1129 of the Bankruptcy Code. Section 1129 provides that
the Bankruptcy Court must find, among other things, that (i) the Prepackaged
Plan has been accepted by all classes of impaired Claims and impaired Interests
entitled to vote on the Prepackaged Plan, except to the extent that
confirmation, despite the rejection of one or more classes, is available under
the "cramdown" provisions of section 1129(b) of the Bankruptcy Code, (ii) the
Prepackaged Plan has been accepted by at least one class of impaired Claims
without considering the votes of "insiders," (iii) the Prepackaged Plan is
feasible (i.e., that there is a reasonable probability that the Company will be
able     
 
                                       56
<PAGE>
 
   
to perform its obligations under the Prepackaged Plan and continue to operate
its business without further financial reorganization or liquidation), and (iv)
the Prepackaged Plan meets the requirements of section 1129(a)(7) of the
Bankruptcy Code, which requires that, with respect to each impaired class, each
holder of a Claim or Interest either (a) accepts the Prepackaged Plan or (b)
receives at least as much under the Prepackaged Plan as such holder would
receive in a liquidation of the Company under Chapter 7 of the Bankruptcy Code.
There are several other confirmation standards that must be met including,
without limitation, (i) the Prepackaged Plan is proposed in good faith, (ii)
the Prepackaged Plan and its proponent comply with the Bankruptcy Code, (iii)
payments for services in or in connection with the Bankruptcy Case or the
Prepackaged Plan are approved by or subject to court approval, (iv) the
identity of management, officers or trustees of the Company have been
disclosed, including their compensation and their continuation in office is
consistent with the interests of creditors, shareholders and public policy, (v)
all statutory fees have been or will be paid, and (vi) if there has been a
modification, there is a continuation of retiree benefits at certain levels.
    
  Although the Company believes that the Company and the Prepackaged Plan will
meet such tests, as well as the other requirements of section 1129 of the
Bankruptcy Code, there can be no assurance that the Bankruptcy Court will reach
the same conclusion and confirm the Prepackaged Plan. Moreover, even if the
Requisite Plan Acceptances have been obtained from the holders of Claims and
Interests prior to the commencement of the Reorganization Case, the Bankruptcy
Court may determine that such holders have not validly accepted the Prepackaged
Plan by finding that the Solicitation did not comply with all of the applicable
provisions of the Bankruptcy Code. See "Special Factors and Certain
Considerations--Considerations Relating to the Prepackaged Plan." In such
event, the Bankruptcy Court may order the Company to resolicit acceptances and,
therefore, confirmation of the Prepackaged Plan would be delayed and possibly
jeopardized. Although the Company believes that the Solicitation complies with
the applicable provisions of the Bankruptcy Code and that the acceptances
received will be accepted as votes for the Prepackaged Plan by the Bankruptcy
Court, there can be no assurance that the Bankruptcy Court will reach the same
conclusion.
   
  Nonconsensual Confirmation. If any impaired class of Claims or Interests
(other than Class 2) entitled to vote on the Prepackaged Plan, does not vote to
accept the Prepackaged Plan, the Company intends to use "cramdown" procedures
with respect to any such impaired classes (other than Class 2), if necessary.
In the event that any impaired class of Claims or Interests does not accept the
Prepackaged Plan, the Bankruptcy Court may nevertheless confirm the Prepackaged
Plan at the Company's request by applying "cramdown" procedures under section
1129(b) if the requirements of section 1129(b) of the Bankruptcy Code are
satisfied. To invoke such "cramdown" procedures, at least one non-insider
impaired class of Claims must accept the Prepackaged Plan, and if, as to each
impaired class which has not accepted the Prepackaged Plan, the Bankruptcy
Court determines that the Prepackaged Plan "does not discriminate unfairly" (as
discussed below) and is "fair and equitable" (as discussed below) with respect
to such nonaccepting class, the Bankruptcy Court may confirm the Prepackaged
Plan. Under the Prepackaged Plan, Classes 2, 3, 4, 5, and 6 constitute classes
of impaired Claims or Interests. If the class of holders of Outstanding Common
Shares do not vote to accept the Prepackaged Plan, all Outstanding Common
Shares will be cancelled and holders of Outstanding Common Shares will not
receive or retain anything under the Prepackaged Plan. See "Special Factors and
Certain Considerations--Considerations Relating to the Prepackaged Plan--
Nonconsensual Confirmation." The Company reserves the right to request
nonconsensual confirmation of the Prepackaged Plan if any such classes (other
than Class 2) rejects the Prepackaged Plan.     
 
  No Unfair Discrimination. A plan of reorganization "does not discriminate
unfairly" if (a) the legal rights of a nonaccepting class are treated in a
manner that is consistent with the treatment of other classes whose legal
rights are identical with those of the nonaccepting class, and (b) no class
receives payments in excess of that which it is legally entitled to receive for
its claims or equity interests. The Company believes that under the Prepackaged
Plan (x) all classes of Claims and Interests are treated in a manner that is
consistent with the treatment of other classes of Claims and Interests, if any,
with which their legal rights are identical, and
 
                                       57
<PAGE>
 
(y) no class of Claims or Interests will receive payments or property with an
aggregate value greater than the aggregate value of the Allowed Claims and
Allowed Interests in such class. Accordingly, the Company believes the
Prepackaged Plan does not discriminate unfairly with respect to any impaired
class of Claims or Interests.
 
  Fair and Equitable Test. The Bankruptcy Code establishes the following
different "fair and equitable" tests for secured creditors, unsecured creditors
and equity holders:
 
    (a) Secured Creditors. Either (i) each secured creditor in an impaired
  class of claims retains the liens securing its secured claim and receives
  on account of its secured claim deferred cash payments having a present
  value equal to the amount of its allowed secured claim, (ii) each impaired
  secured creditor realizes the "indubitable equivalent" of its allowed
  secured claim, or (iii) the property securing the claim is sold free and
  clear of liens with such liens to attach to the proceeds, and the liens
  against such proceeds are treated in accordance with clause (i) or (ii) of
  this subparagraph (a).
 
    (b) Unsecured Creditors. Either (i) each unsecured creditor in an
  impaired class of claims receives or retains under the plan of
  reorganization property of a value equal to the amount of its allowed
  claim, or (ii) the holders of claims that are senior to the claims of the
  nonaccepting class do not receive more than 100% (present value) for their
  claims and the holders of claims and equity interests that are junior to
  the claims of the nonaccepting class do not receive any property under the
  plan of reorganization on account of such claims and equity interests.
 
    (c) Equity Holders. (i) Each holder of an equity interest will receive or
  retain, under the plan of reorganization, property of a value equal to the
  greater of (a) the fixed liquidation preference or redemption price, if
  any, of such stock or (b) the value of the stock, or (ii) the holders of
  interests that are junior to the nonaccepting class will not receive any
  property under the plan of reorganization.
   
THE COMPANY RESERVES THE ABSOLUTE RIGHT TO SEEK NONCONSENSUAL CONFIRMATION OF A
   PLAN WITH RESPECT TO ANY CLASS OF CLAIMS OR INTERESTS (OTHER THAN CLASS 2)
 VOTING ON THE PREPACKAGED PLAN IN THE EVENT THE REQUISITE PLAN ACCEPTANCES ARE
 NOT RECEIVED WITH RESPECT TO ANY SUCH CLASS AND TO REVOKE THE PREPACKAGED PLAN
     OR MAKE ANY MODIFICATIONS OR AMENDMENTS TO TREATMENTS PROVIDED IN THE
  PREPACKAGED PLAN SUBJECT TO THE CONDITIONS CONTAINED IN THE PREPACKAGED PLAN
       THAT ARE NECESSARY TO OBTAIN SUCH NONCONSENSUAL CONFIRMATION.     
 
  Acceptance of the Prepackaged Plan. Under section 1129(a)(10) of the
Bankruptcy Code, if a class of claims or interests is impaired under a plan,
the plan must be accepted by holders of at least one class of "impaired" claims
or interests without considering the votes of "insiders" within the meaning of
the Bankruptcy Code. The classes consisting of the Outstanding Notes,
Outstanding Common Shares, Other Secured Claims and Unsecured Claims are the
only classes of impaired Claims or Interests under the Prepackaged Plan that
are entitled to vote to accept or reject the Prepackaged Plan. No "insiders"
own Outstanding Notes, Other Secured Claims or Unsecured Claims. Outstanding
Common Shares are owned by "insiders" within the meaning of section 1129(a)(10)
and such insiders' votes will not be counted for purposes of determining
whether Class 5 accepts the Prepackaged Plan.
          
  Feasibility Test. The Bankruptcy Code requires that the Bankruptcy Court must
find that a plan passes the Feasibility Test. For the Prepackaged Plan to meet
the Feasibility Test, the Bankruptcy Court must find that the Company, as
reorganized, will possess the resources and working capital necessary to
provide all creditors with the treatment specified in the Prepackaged Plan and
to continue to operate its business upon and after the consummation of the
Prepackaged Plan. The Company believes the Prepackaged Plan satisfies the
Feasibility Test.     
 
                                       58
<PAGE>
 
  As of the Effective Date, the Company will retain assets sufficient to pay
all Claims against the Company and to pay all principal and interest on the New
Senior Notes when and as due. Assuming holders of Outstanding Common Shares
vote to accept the Prepackaged Plan, such holders will retain their interests
in the Company, subject to the Reverse Stock Split and dilution upon issuance
of New Common Shares to the holders of Outstanding Notes.
   
  The Company has analyzed its ability to meet its obligations under the
Restructuring. As part of this analysis, the Company has prepared projections
of its financial performance for the five-year period ending September 30,
2000. These projections, and the significant assumptions on which it is based,
are included in the "Financial Projections." The Company believes, based on
this analysis, that the Restructuring provides a feasible means of
reorganization and operation from which there is a reasonable expectation that,
subject to the risks disclosed in this Disclosure Statement, the Company will
be able to make all payments required to be made pursuant to the Restructuring.
Because financial projections are inherently imprecise, holders of Outstanding
Securities are cautioned not to place undue reliance on the projections. There
can be no assurance that a Bankruptcy Court will agree with the Company's
determination. See "Financial Projections."     
          
  Best Interests of Creditors Test; Liquidation Value. In addition, the
Bankruptcy Code requires that, to confirm a plan of reorganization, each holder
of a claim or equity interest in an impaired class must either (i) accept the
plan, or (ii) receive or retain under the plan cash or property of a value, as
of the effective date of the plan, that is not less than the value such holder
would receive or retain if the debtor were liquidated under Chapter 7 of the
Bankruptcy Code.     
 
  To calculate what holders of each impaired class of claims and equity
interests would receive if the debtor were liquidated under Chapter 7 of the
Bankruptcy Code, the Bankruptcy Court must determine the "liquidation value" of
the debtor, which would consist primarily of the proceeds from a sale of the
debtor's assets by a Chapter 7 trustee. The proceeds from a Chapter 7
liquidation that would be available to all claims would be reduced by, first,
the secured claims to the extent of the value of their collateral, by the costs
and expenses of liquidation, and by other administrative expenses and costs of
the Chapter 7 case and the costs and expenses of a Chapter 11 case, if any.
Costs of liquidation under Chapter 7 of the Bankruptcy Code would include the
fees of a trustee, and of counsel and other professionals (including financial
advisors and accountants) retained by the trustee, asset disposition expenses,
litigation costs and claims arising from the operations of the Company's
business during the Chapter 7 liquidation case. The liquidation itself could
trigger certain "priority claims," such as claims for severance pay, and could
accelerate other priority payments that otherwise would be due in the ordinary
course of business. Those priority claims would be paid in full out of the
liquidation proceeds before the balance would be made available to pay all
unsecured claims or to make any distributions in respect of equity interests.
 
  To determine if the Prepackaged Plan is in the best interests of each
impaired class, the present value of the distributions of the proceeds from the
liquidation of the Company's assets and properties, after subtracting the
amounts attributable to the foregoing Claims, are compared with the value of
the property offered to such classes of Claims and Interests under the
Prepackaged Plan. Provided that the present values offered to such classes of
Claims and Interests under the Prepackaged Plan are equal to or exceed what
would be realized in a Chapter 7 liquidation, the Prepackaged Plan is in the
best interest of each impaired class.
 
  In applying the "best interests test," it is possible that Claims and
Interests in the Chapter 7 case may not be classified as provided in the
Prepackaged Plan. In the absence of a contrary determination by the Bankruptcy
Court, all pre-Chapter 11 unsecured claims that have the same rights upon
liquidation would be treated as one class for purposes of determining the
potential distribution of the liquidation proceeds resulting from the Company's
Chapter 7 case. The distributions from the liquidation proceeds would be
calculated ratably according to the amount of the Claim held by each creditor.
The Company believes that the most likely outcome of liquidation proceedings
under Chapter 7 would be that no class junior to the Outstanding Notes will
receive any distribution.
 
                                       59
<PAGE>
 
  Applying the "best interests test" to the Outstanding Notes, the Outstanding
Common Shares, Other Secured Claims and Unsecured Claims, the Company believes
that the confirmation of the Prepackaged Plan will provide each holder of the
Outstanding Notes, Outstanding Common Shares, Other Secured Claims and
Unsecured Claims with a greater recovery than it would receive if the Company
were liquidated under Chapter 7. In the Company's view, a Chapter 7 liquidation
is uncertain as to timing and amounts of payments to the holders of the
Outstanding Notes and would leave nothing for holders of Unsecured Claims or
Outstanding Common Shares. The Prepackaged Plan provides as much certainty as
is possible regarding these matters. The Company's analysis of estimated
recoveries under the Prepackaged Plan and in the context of a Chapter 7
liquidation is set forth below.
          
  Chapter 7 Liquidation Analysis. The Bankruptcy Court will determine whether
the Prepackaged Plan meets the "best interests" test. Accordingly, the Chapter
7 liquidation analysis set forth herein is provided solely to disclose to
holders of Claims and Interests the effects of a hypothetical Chapter 7
liquidation of the Company, subject to the assumptions set forth herein. There
can be no assurance that such assumptions would be made or accepted by the
Bankruptcy Court. The Chapter 7 liquidation analysis was completed on or about
May 15, 1995. The Company is not aware of any events subsequent to such date
that would materially impact the Chapter 7 liquidation analysis.     
   
  The table below sets forth the computation of liquidation values as of March
31, 1995. See "Special Purpose Valuation Report of Kenneth Leventhal & Company
on Range of Liquidation Values" included herein as Annex D.     
 
                                       60
<PAGE>
 
                           MORTGAGE AND REALTY TRUST
                          RANGE OF LIQUIDATION VALUES
                              
                           AS OF MARCH 31, 1995     
 
<TABLE>   
<CAPTION>
                                                                    RANGE
                                                              -----------------
                                                                LOW      HIGH
                                                              -------- --------
                                                                 (DOLLARS IN
                                                                 THOUSANDS)
 <C>   <S>                                                    <C>      <C>
 Extrapolated Liquidation Value of Portfolio (A)............  $192,600 $218,100
 Adjustments:
 Add:   Cash on Hand (B)...................................      1,500    1,500
        Marketable Securities (B)..........................     71,600   71,600
        Accounts Receivables and Other Assets (A)(B).......      1,800    3,700
                                                              -------- --------
                                                               267,500  294,900
 Less:  Outstanding Debt--Imperial (B).....................     17,600   17,600
        Deferred Compensation (B)..........................        400      400
        Accounts Payable and Accrued Expenses (B)..........      3,400    3,400
        Termination Pay Plan (A)(B)........................      1,400    1,400
        Wind Down G&A Expenses (A).........................      5,000    5,000
        Legal, Liquidation Costs, etc. (A).................     10,000    8,000
                                                              -------- --------
                                                              $229,700 $259,100
                                                              ======== ========
 Range of Liquidation Values as of March 31, 1995...........  $220,000 $260,000
                                                              ======== ========
</TABLE>    
 
                             SEE ACCOMPANYING NOTES
            
         NOTES TO RANGE OF LIQUIDATION VALUES AS OF MARCH 31, 1995     
 
(A) For the purposes of determining a range of liquidation values, the
    following assumptions were utilized.
     
  .All assets in the portfolio were disposed of within a 12 month period
    under a judicially mandated process.     
     
  .The assets were sold in discrete individual transactions, not in a bulk
    sale.     
     
  .The Extrapolated Liquidation Value of the Portfolio was determined by
    applying capitalization rates of 14 percent (high) and 16 percent (low)
    to the net operating income for selected assets for the 12 month period
    from April 1996 to March 1997. These capitalized values were extrapolated
    to the entire MRT portfolio. Real estate assets with outstanding offers
    for sale at the valuation date were included at their offer price. Sales
    proceeds were reduced by estimated selling expenses of five percent.     
     
  .Performing real estate loans were assumed sold at discounts from book
    value of 10 percent (high) and 20 percent (low).     
     
  .Accounts Receivable and Other Assets are considered 50 percent collectible
    (low) or 100% collectible (high).     
     
  .Termination Pay Plan has been estimated at approximately $1.4 million.
           
  .Wind Down G&A expenses were assumed to be $5 million.     
     
  .Legal, accounting and other costs associated with the judicial liquidation
    were assumed to be between $8 million (high) and $10 million (low).     
          
(B) Amount per Mortgage and Realty Trust Quarterly Report on Form 10-Q pursuant
    to Section 12 or 15(d) of the Exchange Act as of March 31, 1995.     
   
  Comparative Analysis     
   
  The Company believes that holders of impaired Claims and Interests will
realize a greater recovery under the Prepackaged Plan than they would under a
Chapter 7 liquidation because of (i) the increased costs and expenses of a
liquidation under Chapter 7 arising from the fees payable to a trustee in
bankruptcy and professional advisors to such trustee, (ii) the erosion in the
value of assets during the expeditious liquidation required under a Chapter 7
liquidation and the "forced sale" atmosphere that would prevail, (iii) the
adverse effects on the saleability of the Company's real estate assets in the
current depressed market for real estate, and (iv) the substantial increase in
Administrative Claims in a Chapter 7 case that would be satisfied on a priority
basis or on parity with existing Unsecured Claims.     
 
                                       61
<PAGE>
 
  The table below sets forth a comparison of the estimated distributions to
holders of Impaired Claims and Interests under the Prepackaged Plan with the
estimated recoveries of such holders in a Chapter 7 liquidation of the Company.
The comparison should be read in conjunction with all other information set
forth under "--Chapter 7 Liquidation Analysis" above.
 
<TABLE>     
<CAPTION>
                                LOW      HIGH
                              -------- --------
                                 (DOLLARS IN
                                 THOUSANDS)
   <S>                        <C>      <C>
   Net Liquidation Value(a).. $241,000 $281,000
</TABLE>    
 
<TABLE>   
<CAPTION>
                  APPROXIMATE
DESCRIPTION OF       CLAIM
CLAIMS             AMOUNT (B)
- --------------    -----------
<S>               <C>
Outstanding
Notes...........   $341,324
Other Secured
Claims (e)......     17,600
Unsecured Claims
(f).............      3,400
Outstanding Com-
mon Shares......        N/A
                   --------
  Total.........   $362,324
                   ========
<CAPTION>
                                      CHAPTER 7                                          PREPACKAGED PLAN
                  --------------------------------------------------- -----------------------------------------------------------
                            LOW                       HIGH                        LOW                          HIGH
                  ------------------------- ------------------------- ----------------------------- -----------------------------
DESCRIPTION OF     ESTIMATED    ESTIMATED    ESTIMATED    ESTIMATED      ESTIMATED      ESTIMATED      ESTIMATED      ESTIMATED
CLAIMS            DISTRIBUTION RECOVERY (C) DISTRIBUTION RECOVERY (C) DISTRIBUTION (D) RECOVERY (C) DISTRIBUTION (D) RECOVERY (C)
- --------------    ------------ ------------ ------------ ------------ ---------------- ------------ ---------------- ------------
                                                              (DOLLARS IN THOUSANDS)
<S>               <C>          <C>          <C>          <C>          <C>              <C>          <C>              <C>
Outstanding
Notes...........    $223,400      65.5%       $263,400       77.2%       $261,850         76.7%        $281,250         82.4%
Other Secured
Claims (e)......      17,600       100%         17,600        100%         17,600          100%          17,600          100%
Unsecured Claims
(f).............           0       0.0%              0        0.0%          3,400          100%           3,400          100%
Outstanding Com-
mon Shares......           0       N/A               0        N/A           3,150          N/A            3,750          N/A
                  ------------ ------------ ------------ ------------ ---------------- ------------ ---------------- ------------
  Total.........    $241,000      66.5%       $281,000       77.6%       $286,000         78.9%        $306,000         84.5%
                  ============ ============ ============ ============ ================ ============ ================ ============
</TABLE>    
   
(a) Based on Liquidation Analysis as of March 31, 1995, before the deduction of
    the Imperial Bank Debt equal to approximately $17.6 million and accounts
    payable and accruals of approximately $3.4 million. See "Special Purpose
    Valuation Report of Kenneth Leventhal & Company on Range of Going Concern
    Values" included herein as Annex C.     
   
(b) Includes accrued interest through March 31, 1995.     
 
(c) Percentage shown in the table is the quotient of the available distribution
    divided by the estimated amount of claims in such class.
   
(d) For purposes of computing available distribution under the Prepackaged
    Plan, securities are valued based upon a reorganization value between
    $265 million and $285 million, and a reorganization equity value between
    $105 million and $125 million. See "Special Purpose Valuation Report of
    Kenneth Leventhal & Company on Range of Going Concern Values" and "Special
    Purpose Valuation Report of Kenneth Leventhal & Company on Range of
    Liquidation Values" included herein as Annexes C and D, respectively. It
    should be noted that depending on general market conditions, the size of
    the block of New Common Stock that may trade and other factors prevailing
    at the relevant times, the securities may trade at prices lower than those
    reflected above. Accordingly, no representation can be or is being made
    with respect to whether the percentage recoveries shown above will actually
    be realized by the holder of claims in any particular Class under the
    Prepackaged Plan.     
 
(e) Represents Debt of a wholly-owned Subsidiary, which is a California limited
    partnership, of the Company. The assets of such subsidiary are included in
    the Net Liquidation Value described above.
   
(f) Represents accounts payable and accrued expenses as of March 31, 1995.     
 
                                       62
<PAGE>
 
  Accordingly, the Company believes that the Prepackaged Plan meets the
requirements of section 1129(a)(7) of the Bankruptcy Code because each holder
of a Claim or Interest impaired under the Prepackaged Plan will have accepted
the Prepackaged Plan or will recover at least as much under the Prepackaged
Plan as such holder would recover in a Chapter 7 liquidation of the Company.
 
EFFECTS OF PREPACKAGED PLAN CONFIRMATION
          
  Discharge and Injunction. On the Effective Date, the Company will be
discharged from all Claims and Interests that exist prior to confirmation of
the Prepackaged Plan, except as provided for in the Prepackaged Plan or the
Confirmation Order. Except as otherwise provided in the Prepackaged Plan, the
rights afforded under the Prepackaged Plan and the treatment of all Claims and
Interests therein will be in exchange for and in complete satisfaction,
discharge and release of all Claims and Interests of any nature whatsoever,
including any interest accrued on such Claims from and after the Petition Date,
against the Company and the Debtor in Possession, or any of their assets or
properties. Except as otherwise provided in the Prepackaged Plan or the
Confirmation Order, (i) on the Effective Date, the Company will be deemed
discharged and released to the fullest extent permitted by section 1141 of the
Bankruptcy Code from all Claims and Interests, including, but not limited to,
demands, liabilities, Claims and Interests that arose before the Confirmation
Date and all debts of the kind specified in sections 502(g), 502(h) or 502(i)
of the Bankruptcy Code, whether or not, (a) a proof of claim or proof of
interest based on such debt or Interest is filed or deemed filed pursuant to
section 501 of the Bankruptcy Code, (b) a Claim or Interest based on such debt
or Interest is allowed pursuant to section 502 of the Bankruptcy Code, or (c)
the holder of a Claim or Interest based on such debt or Interest has accepted
the Prepackaged Plan, and (ii) all entities will be precluded from asserting
against the Reorganized Debtor, its successors or its assets or properties any
other or further Claims or Interests based upon any act or omission,
transaction or other activity of any kind or nature that occurred prior to the
Confirmation Date. Except as otherwise provided in the Prepackaged Plan or the
Confirmation Order, the Confirmation Order will act as a discharge of any and
all Claims against and all debts and liabilities of the Company, as provided in
sections 524 and 1141 of the Bankruptcy Code, and such discharge will void any
judgment against any of the Company at any time obtained to the extent that it
relates to a Claim discharged.     
 
  Except as otherwise provided in the Prepackaged Plan or the Confirmation
Order, on and after the Effective Date, all entities who held, currently hold
or may hold a debt, Claim or Interest discharged under the Prepackaged Plan are
permanently enjoined from taking any of the following actions on account of any
such discharged debt, Claim or Interest: (1) commencing or continuing in any
manner any action or other proceeding against the Company, the Reorganized
Debtor, their successors or their respective property; (2) enforcing,
attaching, collecting or recovering in any manner any judgment, award, decree
or order against the Company, the Reorganized Debtor, their successors or their
respective property; (3) creating, perfecting or enforcing any lien or
encumbrance against the Company, the Reorganized Debtor, their successors or
their respective property; (4) asserting any setoff, right of subrogation or
recoupment of any kind against any obligation due to the Company, the
Reorganized Debtor, their successors or their respective property; and (5)
commencing or continuing any action, in any manner, in any place that does not
comply with or is inconsistent with the provisions of the Prepackaged Plan or
the Confirmation Order. Any Entity injured by any willful violation of such
injunction will recover actual damages, including costs and attorneys' fees,
and, in appropriate circumstances, may recover punitive damages, from the
willful violator.
          
  Revesting. Except as otherwise provided in the Prepackaged Plan, the Company
will, as the Reorganized Debtor, continue to exist after the Effective Date,
with all the powers of a REIT under applicable law and without prejudice to any
right to alter or terminate such existence under applicable state law. Without
limiting the foregoing, the Company as the Reorganized Debtor may pay the
charges that it incurs after the Effective Date for professionals' fees,
disbursements, expenses or related support services without application to the
Bankruptcy Court.     
 
  Except as otherwise provided in the Prepackaged Plan, on the Effective Date,
all property of the Estate of the Company will revest in the Reorganized
Debtor, free and clear of all Claims, liens, encumbrances and
 
                                       63
<PAGE>
 
   
other interests of holders of Claims and Interests. From and after the
Effective Date, the Reorganized Debtor may operate its business and use,
acquire and dispose of property and settle and compromise Claims or Interests
without supervision by the Bankruptcy Court and free of any restrictions of the
Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly
imposed by the Prepackaged Plan, the Confirmation Order, the New Senior Note
Indenture, the New Collateral Documents (as hereinafter defined) and any
document, agreement or instrument delivered in connection therewith.     
          
  Retention of Jurisdiction. Notwithstanding the entry of the Confirmation
Order or the occurrence of the Effective Date, the Bankruptcy Court will retain
such jurisdiction over the Reorganization Case after the Effective Date as is
legally permissible, including, without limitation, to (a) allow, disallow,
determine, liquidate, classify or establish the priority or secured or
unsecured status of or estimate of any Claim or Interest, including, without
limitation, the resolution of any request for payment of any Administrative
Claim or Class 2 Expense Claims and the resolution of any and all objections to
the allowance or priority of Claims or Interests, (b) grant or deny any and all
applications for allowance of compensation or reimbursement of expenses
authorized pursuant to the Bankruptcy Code or the Prepackaged Plan, for periods
ending on or before the Effective Date, (c) resolve any motions pending on the
Effective Date to assume, assume and assign or reject any executory contract or
unexpired lease to which the Company is a party or with respect to which the
Company may be liable and to hear, determine and, if necessary, liquidate, any
and all Claims arising therefrom, (d) ensure that distributions to holders of
Allowed Claims and Allowed Interests are accomplished pursuant to the
provisions of the Prepackaged Plan, (e) decide or resolve any and all
applications, motions, adversary proceedings, contested or litigated matters
and any other matters, and grant or deny any applications involving the Company
that may be pending on the Effective Date, (f) enter such orders as may be
necessary or appropriate to implement or consummate the provisions of the
Prepackaged Plan and all contracts, instruments, releases, and other agreements
or documents created in connection with the Prepackaged Plan or this Disclosure
Statement, (g) resolve any and all controversies, suits or issues that may
arise in connection with consummation of the Prepackaged Plan, (h) modify the
Prepackaged Plan before or after the Effective Date pursuant to section 1127 of
the Bankruptcy Code, or to modify this Disclosure Statement or any contract,
instrument, release or other agreement or document created in connection with
the Prepackaged Plan or this Disclosure Statement in accordance with section
1127 of the Bankruptcy Code; or remedy any defect or omission or reconcile any
inconsistency in any Bankruptcy Court order, the Prepackaged Plan, this
Disclosure Statement or any contract, instrument, release or other agreement or
document created in connection with the Prepackaged Plan or this Disclosure
Statement, in such manner as may be necessary or appropriate to consummate the
Prepackaged Plan, to the extent authorized by the Bankruptcy Code, (i) issue
injunctions, enter and implement other orders or take such other actions as may
be necessary or appropriate to restrain interference by any entity with
consummation or enforcement of the Prepackaged Plan, (j) enter and implement
such orders as are necessary or appropriate if the Confirmation Order is for
any reason modified, stayed, reversed, revoked or vacated, and (k) enter an
order on a final decree concluding the Reorganization Case.     
 
  If the Bankruptcy Court abstains from exercising jurisdiction or is otherwise
without jurisdiction over any matter arising out of the Reorganization Case,
including, without limitation, the matters set forth above, the Prepackaged
Plan will have no effect upon and will not control, prohibit or limit the
exercise of jurisdiction by any other court having competent jurisdiction with
respect to such matter.
 
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN
   
  If the Company commences the Reorganization Case and the Prepackaged Plan is
not subsequently confirmed and consummated, the alternatives to the Prepackaged
Plan include (a) the proposal of an alternative plan of reorganization, or (b)
liquidation of the Company under Chapter 11 or 7 of the Bankruptcy Code or
otherwise.     
          
  Alternative Plans. If the Prepackaged Plan is not confirmed, the Company or,
if the Company's exclusive period in which to file a plan of reorganization has
expired or is terminated, any other party in interest could     
 
                                       64
<PAGE>
 
attempt to formulate a different plan. Such a plan might involve either a
reorganization and continuation of the Company's business or an orderly
liquidation of its assets. With respect to an alternative plan, the Company has
explored various other alternatives in connection with the extensive
negotiation process involved in the formulation and development of the
Prepackaged Plan. The Company believes that the Prepackaged Plan enables
holders of Claims and Interests to realize the most value under the
circumstances.
          
  Liquidation Under Chapter 7. If no plan is confirmed, the Reorganization Case
may be converted to a case under Chapter 7 of the Bankruptcy Code, pursuant to
which a trustee would be elected or appointed to liquidate the assets of the
Company for distribution to creditors in accordance with the priorities
established by the Bankruptcy Code. A discussion of the effects that a Chapter
7 liquidation would have on the recovery of holders of Claims and Interests is
set forth under "--Confirmation of the Prepackaged Plan--Best Interests of
Creditors Test; Liquidation Value" above. The Company believes that holders of
impaired Claims would realize a greater recovery under the Prepackaged Plan
than would be realized under a Chapter 7 liquidation. Based upon the
liquidation value, holders of Outstanding Common Shares would not receive or
retain anything under a Chapter 7 liquidation.     
 
INSIDER AND AFFILIATE CLAIMS
 
  The Company is not aware of any claims that may be asserted by its former
affiliate or by any of its subsidiaries. Members of the Board of Trustees are
currently parties to a deferred compensation plan. The Company does not
anticipate any insider claims to be asserted based on this plan. However, the
Company cannot guarantee that such claims may not be asserted in the future.
 
 HOLDERS OF OUTSTANDING NOTES, OUTSTANDING COMMON SHARES, OTHER SECURED CLAIMS
  AND UNSECURED CLAIMS AND ALL OTHER INTERESTED PARTIES ARE URGED TO READ THE
  PREPACKAGED PLAN IN ITS ENTIRETY SO THAT THEY MAY MAKE AN INFORMED JUDGMENT
                        CONCERNING THE PREPACKAGED PLAN.
 
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO RESALES OF NEW COMMON
SHARES AND NEW SENIOR NOTES
 
  After completion of the Restructuring, there will be approximately 11,226,000
New Common Shares outstanding and approximately $110 million in principal
amount of New Senior Notes outstanding.
 
  The New Common Shares and New Senior Notes to be issued pursuant to the
Prepackaged Plan may be freely transferred by most recipients thereof and all
resales in the New Common Shares and New Senior Notes are exempt from
registration under federal and state securities laws, unless the holder is an
"underwriter" with respect to such securities. Section 1145(b) of the
Bankruptcy Code defines four types of "underwriters:"
 
  (i) persons who purchase a claim against, an interest in, or a claim for
      administrative expense against the debtor with a view to distributing
      any security received in exchange for such a claim or interest;
 
  (ii) persons who offer to sell securities offered under a plan for the
       holders of such securities;
 
  (iii) persons who offer to buy such securities for the holders of such
     securities, if the offer to buy is (a) with a view to distributing such
     securities or (b) made under a distribution agreement; and
 
  (iv) a person who is an "issuer" with respect to the securities, as the
       term "issuer" is defined in section 2(11) of the Securities Act.
 
  Under section 2(11) of the Securities Act, an "issuer" includes any person
directly or indirectly controlling or controlled by the issuer, or any person
under direct or indirect common control with the issuer. ANY PERSON OR GROUP OF
PERSONS, WHO ACT IN CONCERT OR WHO RECEIVES A SUBSTANTIAL AMOUNT OF NEW COMMON
SHARES PURSUANT TO THE PREPACKAGED PLAN, MAY BE DEEMED TO BE AN "ISSUER" AND
THEREFORE AN "UNDERWRITER" UNDER THE FOREGOING DEFINITION.
 
                                       65
<PAGE>
 
  To the extent that persons deemed to be "underwriters" receive New Common
Shares or New Senior Notes pursuant to the Prepackaged Plan, resales by such
persons would not be exempted by section 1145 of the Bankruptcy Code from
registration under the Securities Act or other applicable law. Persons deemed
to be underwriters, however, may be able to sell such securities without
registration subject to the provisions of Rule 144 under the Securities Act,
which permits the public sale of securities received pursuant to the
Prepackaged Plan by "underwriters," subject to the availability to the public
of current information regarding the issuer and to volume limitations and
certain other conditions. In addition, each holder of Allowed Class 2 Claims
that receives sufficient New Common Shares such that it and its affiliates own
5% or more of the total New Common Shares outstanding or 5% or more of New
Senior Notes may enter into the Registration Rights Agreement which will permit
registration of the sale of their New Common Shares or New Senior Notes in
certain circumstances.
   
  The Registration Rights Agreement requires the Company to file a registration
statement under the Securities Act for the offering on a continuous or delayed
basis in the future of the New Common Shares and New Senior Notes (the "Shelf
Registration") within 60 days from the Effective Date. Pursuant to the
Registration Rights Agreement, the Company will use its best efforts to cause
to be declared effective as soon as possible after such filing and to keep the
Shelf Registration continuously effective for the period beginning on the date
on which the Shelf Registration is declared effective and ending on the earlier
of (i) the third anniversary of such date plus the number of days of any
suspension of the holders' right to sell thereunder, and (ii) the first date
that there are no securities for which a right of registration exists. A group
of holders of at least 10% of the New Common Shares or New Common Notes may
demand registration beginning at the end of the Shelf Registration period and
ending on the earlier of (i) the seventh anniversary thereof and (ii) the first
date on which there are no securities for which a right of registration exists.
    
  Whether or not any particular person would be deemed to be an "underwriter"
with respect to any security to be issued pursuant to the Prepackaged Plan
would depend upon various facts and circumstances applicable to that person.
Accordingly, the Company expresses no view as to whether any person would be an
"underwriter" with respect to any security to be issued pursuant to the
Prepackaged Plan.
 
  GIVEN THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR
PERSON MAY BE AN "UNDERWRITER," THE COMPANY MAKES NO REPRESENTATION CONCERNING
THE RIGHT OF ANY PERSON TO TRADE IN THE SECURITIES TO BE DISTRIBUTED PURSUANT
TO THE RESTRUCTURING. THE COMPANY RECOMMENDS THAT POTENTIAL RECIPIENTS OF THE
NEW COMMON SHARES AND NEW SENIOR NOTES CONSULT THEIR OWN COUNSEL CONCERNING
WHETHER THEY MAY FREELY TRADE SUCH SECURITIES.
 
  No precise predictions can be made as to the effect, if any, that market
sales of New Common Shares and New Senior Notes or the availability of New
Common Shares for sale will have on the market prices of the Common Shares and
New Senior Notes prevailing from time to time. Nevertheless, sales of
substantial amounts of the New Common Shares and New Senior Notes in the public
market could adversely affect the prevailing market prices of the Common Shares
and New Senior Notes and could impair the Company's ability to raise capital at
that time through the sale of securities.
 
                                       66
<PAGE>
 
                    THE PLAN SOLICITATION; VOTING PROCEDURES
 
GENERAL
   
  This Disclosure Statement, together with the accompanying Ballot, Master
Ballot and the related materials delivered together herewith, is being
furnished to each Record Holder (as defined below) of Outstanding Notes,
Outstanding Common Shares, Other Secured Claims and Unsecured Claims in
connection with the Restructuring. The term "Record Holder" with respect to a
vote on the Prepackaged Plan means any person holding the beneficial interest
in a Claim or Interest on the Record Date. Holders who purchase Claims or
Interests or whose purchase of Claims or Interests is registered after the
Record Date who wish to vote on the Prepackaged Plan must arrange with the
seller of such Claims or Interests to receive a Ballot from the Record Holder
on such date. Abstentions will not be counted as votes for or against the
Prepackaged Plan, since only votes actually cast will be counted. Therefore,
the Prepackaged Plan could be approved by an affirmative vote of (i) holders
holding significantly less than two-thirds in amount and one-half in number of
each of the classes of holders of Outstanding Notes, Other Secured Claims and
Unsecured Claims and (ii) holders of Outstanding Common Shares holding
significantly less than two-thirds in amount of the Outstanding Common Shares.
See "--Required Votes" below.     
   
  "Record Holders" do not include brokerage firms, commercial banks, trust
companies or other nominees that do not hold Outstanding Securities for their
own account. Such entities should provide copies of this Disclosure Statement,
the Ballots and all of the related materials to their customers and to
beneficial owners of such Outstanding Securities. Any beneficial owner who has
not received a Disclosure Statement or Ballot should contact its brokerage firm
or nominee, the Solicitation Agent, the Information Agent or the Company.     
   
  If, by the Expiration Date, the Requisite Plan Acceptances have been received
from the holder of Outstanding Notes, the Company currently intends to commence
the Reorganization Case by filing a voluntary petition for relief under Chapter
11 of the Bankruptcy Code and to use the Plan Acceptances, as evidenced by the
Ballots and Master Ballots solicited pursuant to this Disclosure Statement, to
seek confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy
Code as promptly as possible.     
 
  Under section 1126(b) of the Bankruptcy Code, a holder of a claim or equity
interest that has accepted or rejected a plan of reorganization before the
commencement of the Chapter 11 case will be deemed to have accepted or rejected
such plan for purposes of confirmation of such plan under Chapter 11 of the
Bankruptcy Code if the solicitation of such acceptance or rejection is in
compliance with any applicable non-bankruptcy law, rule or regulation governing
the adequacy of disclosure in connection with the solicitation.
   
  Rule 3018(b) of the Bankruptcy Rules prescribes the conditions that must be
satisfied in order to count the ballots solicited with respect to a plan of
reorganization prior to the commencement of a Chapter 11 case. The rule
requires that the Bankruptcy Court must determine, after notice and a hearing,
that (i) such Chapter 11 plan was disseminated to substantially all holders of
impaired claims and equity interests, (ii) the time prescribed for voting on
such a plan was not unreasonably short, and (iii) the solicitation was
conducted in compliance with all applicable non-bankruptcy laws, rules and
regulations, or, if there are no such applicable laws, rules or regulations,
then the disclosure statement must contain "adequate information," or such
prepetition solicitation will not be considered. Section 1125(a) of the
Bankruptcy Code defines "adequate information" as information of a kind, and in
sufficient detail, as far as is reasonably practicable in light of the nature
and history of a company and the condition of such company's books and records,
that would enable a hypothetical reasonable investor typical of holders of
claims or equity interests of the relevant class to make an informed judgment
about the plan of reorganization.     
   
  The Company believes that this Disclosure Statement and the Plan Solicitation
comply with applicable non-bankruptcy law and section 1125(a) of the Bankruptcy
Code and, therefore, with the requirements of the Bankruptcy Code and
applicable Bankruptcy Rules, including section 1126(b) of the Bankruptcy Code
and Rule 3018(b) of the Bankruptcy Rules, for the purpose of soliciting
acceptances or rejections of the Prepackaged Plan and that duly executed
Ballots and Master Ballots will be in compliance with the applicable provisions
of the Bankruptcy Code. This Disclosure Statement and the Prepackaged Plan
(delivered herewith     
 
                                       67
<PAGE>
 
   
as Annex A including all exhibits thereto) are being transmitted to all known
Record Holders. The solicitation period for voting on the Prepackaged Plan is
more than 20 business days, which is the time prescribed by the Commission for
an exchange offer pursuant to Rule 14e-1 under the Exchange Act. The Company
has filed with the Commission proxy materials relating to Common Share
acceptances solicited hereby. Moreover, the Company believes that this
Disclosure Statement contains adequate information for all Holders to cast an
informed vote to accept or reject the Prepackaged Plan.     
 
  IF THE PREPACKAGED PLAN IS CONFIRMED BY THE BANKRUPTCY COURT, EACH HOLDER OF
AN OUTSTANDING NOTE WILL RECEIVE THE SAME CONSIDERATION AS OTHER HOLDERS OF
OUTSTANDING NOTES, EACH HOLDER OF OTHER CLAIMS WILL RECEIVE THE SAME
CONSIDERATION AS OTHER CLAIMS IN THE SAME CLASS AND EACH HOLDER OF OUTSTANDING
COMMON SHARES WILL RETAIN THE SAME PROPERTY AS OTHER HOLDERS OF OUTSTANDING
COMMON SHARES WHETHER OR NOT SUCH HOLDER VOTED TO ACCEPT THE PREPACKAGED PLAN.
MOREOVER, UPON CONFIRMATION, THE PREPACKAGED PLAN WILL BE BINDING ON ALL
CREDITORS AND INTEREST HOLDERS OF THE COMPANY REGARDLESS OF WHETHER SUCH
CREDITORS AND INTEREST HOLDERS VOTED TO ACCEPT THE PREPACKAGED PLAN.
 
VOTING RECORD DATE
   
  Consistent with the provisions of Rule 3018(b) of the Bankruptcy Rules and
Rule 14e-1 under the Exchange Act, the Company has fixed the close of business
(New York City time) on July 7, 1995 as the Record Date for determining which
Holders are eligible to vote on the Prepackaged Plan.     
 
REQUIRED VOTES
   
  To confirm the Prepackaged Plan without utilizing the "cramdown" provisions
of Chapter 11 of the Bankruptcy Code as to a class or Claims or Interests
entitled to vote on the Prepackaged Plan, it is necessary, among other things,
for the Company to receive Plan Acceptances from (i) holders of Claims
constituting at least two-thirds in dollar amount and more than one-half in
number of the allowed Claims in each impaired class voting on the Prepackaged
Plan and (ii) holders of at least two-thirds in amount of the Outstanding
Common Shares in such class voting on the Restructuring. Ballots not cast in
favor of or against the Prepackaged Plan are not counted as votes for or
against the Prepackaged Plan. Therefore, the Prepackaged Plan could be approved
by (i) holders with an affirmative vote of significantly less than the holders
of two-thirds in dollar amount and one-half in number of each of the
Outstanding Notes, Other Secured Claims and Unsecured Claims and (ii) holders
of Outstanding Common Shares with an affirmative vote of significantly less
than two-thirds of the holders of the Outstanding Common Shares. If necessary,
the Company intends to use cramdown procedures with respect to all impaired
classes which reject the Prepackaged Plan other than the class of holders of
Outstanding Notes. In any event, confirmation of the Prepackaged Plan will
require, among other things, the acceptance (as indicated above) of at least
one impaired non-insider class of Claims. See "The Prepackaged Plan--
Confirmation of the Prepackaged Plan--Nonconsensual Confirmation." The Company
reserves the right to request nonconsensual confirmation of the Prepackaged
Plan in the event any impaired class entitled to vote (other than the class of
Outstanding Notes) fails to vote to accept the Prepackaged Plan.     
 
                                       68
<PAGE>
 
HOW TO VOTE
          
  Persons Entitled to Vote. The following classes of Claims and Outstanding
Common Shares are impaired under the Prepackaged Plan and holders of allowed
Claims or Interests in such classes, as of the Record Date, are entitled to
vote to accept or reject the Prepackaged Plan upon the terms and subject to the
conditions set forth herein and in the Prepackaged Plan:     
     
  Class 2--Claims of Holders of Outstanding Notes     
     
  Class 3--Other Secured Claims     
     
  Class 4--Unsecured Claims     
     
  Class 5--Interests of Holders of Outstanding Common Shares     
 
The class of holders of Outstanding Stock Rights Claims (Class 6) is also
impaired under the Prepackaged Plan; however, no distribution shall be made to
holders of such Claims and, therefore, such class is deemed to have rejected
the Prepackaged Plan and is not being solicited to vote to accept or reject the
Prepackaged Plan.
          
  Voting Procedure. The Company will not hold a meeting to vote on the
Prepackaged Plan. Rather, the Company is soliciting acceptance of the
Prepackaged Plan by means of Ballots and Master Ballots. All votes to accept or
reject the Prepackaged Plan must be cast by using the Ballot or, in the case of
a brokerage firm or other nominee holding Outstanding Securities in its own
name on behalf of a beneficial owner, the Master Ballot, enclosed with this
Disclosure Statement (or original, manually executed facsimiles thereof).
Brokerage firms or other nominees holding Outstanding Notes for the account of
only one beneficial owner may use the Ballot. Purported votes that are cast in
any other manner will not be counted. Ballots and Master Ballots must be
received by the solicitation agent no later than 12:00 Midnight, New York City
time, on the Expiration Date.     
 
  ONLY BALLOTS AND MASTER BALLOTS ARE BEING REQUESTED AT THIS TIME. DO NOT
DELIVER ANY OTHER DOCUMENTS PERTAINING TO THE PLAN SOLICITATION TO THE COMPANY,
THE SOLICITATION AGENT OR ANY OTHER AGENT UNLESS AND UNTIL REQUESTED TO DO SO
BY THE COMPANY.
   
  Beneficial Owners. Any beneficial owner holding Outstanding Securities in its
own name that is reflected on the register (maintained with respect to the
Outstanding Notes by the Outstanding Note Trustee pursuant to the Outstanding
Note Indenture and maintained with respect to the Outstanding Common Shares by
the transfer agent for the Company's Common Shares) on the applicable Record
Date can vote by completing and signing the enclosed Ballot and returning it
directly to the Solicitation Agent (using the enclosed pre-addressed, stamped
envelope) prior to the Expiration Date. For purposes of voting to accept or
reject the Prepackaged Plan, such beneficial owners of Outstanding Securities
will be deemed to be the "holders" of such Outstanding Securities.     
 
  Any broker or other intermediary having power of attorney or a proxy to vote
on behalf of a beneficial owner or a beneficial owner holding Outstanding
Securities in "street names" (i.e., through a brokerage firm, bank, trust
company or other nominee) can vote by following the instructions set forth
below:
 
  1. Fill in all the applicable information on the Ballot.
 
  2.  Sign the Ballot (unless the Ballot has already been signed by the bank,
      trust company or other nominee).
 
  3. Return the Ballot to the addressee in the pre-addressed, stamped
     envelope enclosed with the Ballot. If no envelope was enclosed, contact
     the Solicitation Agent for instructions.
 
                                       69
<PAGE>
 
Any Ballot submitted to a brokerage firm or proxy intermediary will not be
counted until such brokerage firm or proxy intermediary (i) properly executes
and delivers such Ballot to the Solicitation Agent or (ii) properly completes
and delivers a corresponding Master Ballot to the Solicitation Agent prior to
the Expiration Date.
          
  Brokerage Firms, Banks, and Other Nominees. A brokerage firm, commercial
bank, trust company or other nominee that is the Record Holder of Outstanding
Securities for a beneficial owner can vote on behalf of such beneficial owner
by (i) distributing a copy of this Disclosure Statement, the Ballot and all of
the related materials and all appropriate Ballots to such beneficial owner,
(ii) collecting all such Ballots, (iii) completing a Master Ballot compiling
the votes and other information from the Ballots collected, and (iv)
transmitting such completed Master Ballot to the Solicitation Agent prior to
the Expiration Date. A proxy intermediary acting on behalf of a brokerage firm
or bank may follow the procedures outlined in the preceding sentence to vote on
behalf of such beneficial owner. Alternatively, a brokerage firm, commercial
bank, trust company or other nominee that is the Record Holder of Outstanding
Securities for only one beneficial owner may arrange for such beneficial owner
to vote by distributing a copy of this Disclosure Statement and a Ballot to
such beneficial owner for such beneficial owner to execute and return to the
Solicitation Agent.     
          
  Other. If a Ballot is signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should indicate such
capacity when signing and, unless otherwise determined by the Company, must
submit proper evidence satisfactory to the Company of their authority to act in
such capacity.     
 
AGREEMENTS UPON FURNISHING BALLOTS ACCEPTING THE RESTRUCTURING
 
  The delivery of a Ballot or Master Ballot accepting the Prepackaged Plan
pursuant to one of the procedures set forth herein will constitute the
agreement of the Holders to accept all the terms of, and conditions to, the
Prepackaged Plan (or any modification thereof that does not materially and
adversely affect the treatment of the class of Claims or Interests of which
such Holder is a member).
 
WAIVERS OF DEFECTS, IRREGULARITIES, ETC.
 
  Unless otherwise directed by the Bankruptcy Court, all questions regarding
the validity, form, eligibility (including the time of receipt), acceptance and
revocation or withdrawal of Ballots and Master Ballots will be determined by
the Company in its sole discretion (subject to applicable law), whose
determinations will be final and binding. As indicated below under "Revocation
Rights," effective revocation of Ballots and Master Ballots must be delivered
to the Solicitation Agent prior to 12:00 Midnight (New York City time) on the
Expiration Date. The Company reserves the right to contest the validity of any
such revocation. The Company also reserves the right (subject to applicable
law) to reject any and all Ballots and Master Ballots not in proper form, the
acceptance of which would, in the opinion of the Company or its counsel, be
unlawful. The Company further reserves the right (subject to applicable law) to
waive any defects or irregularities or conditions of delivery with respect to
any particular Ballot or Master Ballot. The interpretation of defects or
irregularities (including the Ballot or Master Ballot and the respective
instructions thereto) by the Company, unless otherwise directed by the
Bankruptcy Court, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with deliveries of Ballots or Master
Ballots must be cured within such time as the Company (or the Bankruptcy Court)
determines. Neither the Company nor any other person will be under any duty to
provide notification of defects or irregularities with respect to deliveries of
Ballots or Master Ballots nor will any of them incur any liabilities for
failure to provide such notification. Unless otherwise directed by the
Bankruptcy Court, delivery of such Ballots and Master Ballots will not be
deemed to have been made until such irregularities have been cured or waived.
Ballots and Master Ballots with irregularities that have not been cured or
waived will be invalidated.
 
                                       70
<PAGE>
 
EXPIRATION DATE; EXTENSION; AMENDMENTS
 
  The Solicitation will expire at 12:00 Midnight, New York City Time, on
        , 1995, unless extended by the Company, in its sole discretion, in
which case the term "Expiration Date" will mean the latest time and date to
which the Solicitation is extended. Except to the extent the Company so
determines or as permitted by the Bankruptcy Court pursuant to Rule 3018 of the
Bankruptcy Rules, Ballots and Master Ballots that are received after the
Expiration Date will not be accepted or used by the Company in connection with
the Company's request for confirmation of the Prepackaged Plan.
 
  The Company reserves the absolute right, in its sole discretion, at any time
or from time to time, to extend the Solicitation during which Ballots and
Master Ballots will be accepted by making a public announcement of such
extension no later than 9:00 a.m., New York City time, on the business day next
succeeding any previously announced Expiration Date. Without limiting the
manner in which the Company may choose to make any public announcement, the
Company will not have any obligation to publish, advertise or otherwise
communicate any such public announcement, except as may be required by
applicable law, other than by issuing a news release to the Dow Jones News
Service. During any extension, all Ballots and Master Ballots previously
delivered will remain subject to all the terms and conditions of the
Solicitation as modified or amended, including the withdrawal and revocation
rights specified herein and therein.
   
  The Company reserves the right to amend, modify or supplement the Prepackaged
Plan prior to effectiveness, subject to the conditions contained in the
Prepackaged Plan. The Company also reserves the right to cancel the
Solicitation at any time prior to the Expiration Date and revoke the
Prepackaged Plan, subject to the conditions contained in the Prepackaged Plan.
The Company will give the Record Holders notice of any amendments,
modifications or supplements as may be required by applicable law. See "The
Prepackaged Plan--Modification of the Prepackaged Plan" and "The Prepackaged
Plan--Revocation of the Prepackaged Plan."     
 
REVOCATION RIGHTS
 
  Any Record Holder that previously submitted to the Solicitation Agent prior
to the Expiration Date a properly completed Ballot or Master Ballot, may revoke
such Ballot or Master Ballot and change its vote by submitting to the
Solicitation Agent prior to 12:00 Midnight (New York City time) on the
Expiration Date, a properly completed Ballot or Master Ballot for acceptance or
rejection of the Restructuring. In the event that more than one timely,
properly completed Ballot or Master Ballot is received, only the Ballot or
Master Ballot which bears the latest date will be counted for purposes of
determining whether the Requisite Plan Acceptances have been received. After
commencement of the Reorganization Case, revocation may be effected only with
the approval of the Bankruptcy Court.
   
  To be valid, a notice of revocation prior to the Expiration Date must (i)
contain the description of the Claim or the Outstanding Securities to which it
relates and the aggregate principal amount represented by such Claim or
Outstanding Securities, (ii) be signed by the Record Holder, in the same manner
as the Ballot or Master Ballot was signed, and (iii) be received prior to the
Expiration Date by the Solicitation Agent at the address set forth in this
Disclosure Statement. Prior to the Expiration Date, the Company intends to
consult with the Solicitation Agent to determine whether any revocations of
Ballots or Master Ballots were received and whether the Requisite Plan
Acceptances have been received. The Company expressly reserves the absolute
right to contest the validity of any such revocation of Ballots or Master
Ballots.     
 
  Unless otherwise directed by the Bankruptcy Court, a purported notice of
revocation of Ballots or Master Ballots that is not received in a timely manner
by the Solicitation Agent will not be effective to revoke a previously
furnished valid Ballot or Master Ballot.
 
                                       71
<PAGE>
 
SOLICITATION AGENT
 
  The Company, or its designee, will act as Solicitation Agent for the
Solicitation. All correspondence in connection with the Plan Solicitation, the
Ballots and the Master Ballots should be addressed to the Company at 8380 Old
York Road, Suite 300, Elkins Park, Pennsylvania 19027-1590, attention: Daniel
F. Hennessey (telephone: (215) 881-1525).
 
INFORMATION AGENT
 
  The Company, or its designee, will act as Information Agent in connection
with the Solicitation. Questions and requests for assistance may be directed to
the Company at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027-
1590, attention: Daniel F. Hennessey (telephone: (215) 881-1525).
 
OTHER MATTERS
   
  The cost of soliciting Ballots and Master Ballots will be borne by the
Company. Ballots and Master Ballots may be solicited by personal interview,
telephone and telegraph as well as by use of the mails. It is anticipated that
banks, brokerage houses and other custodians, nominees or fiduciaries will be
requested to forward soliciting material to their principals and to obtain
authorization for the execution of Ballots and Master Ballots. The Company will
not pay any commission or other remuneration to any broker, dealer, salesman or
other persons for soliciting acceptances. Employees of the Company
participating in the solicitation of Ballots and Master Ballots will not
receive any additional remuneration. The Company estimates that the total cost
to the Company of soliciting Ballots and Master Ballots will be approximately
$150,000.     
 
  Proposals of holders of Common Shares intended to be presented at the next
annual meeting of shareholders must be received by the Company on or prior to
September 1, 1995 in order to be considered for inclusion in the Company's
proxy statement relating to the 1996 annual meeting.
 
                                       72
<PAGE>
 
                             FINANCIAL PROJECTIONS
                                  (UNAUDITED)
   
  In connection with the preparation of the Prepackaged Plan, the following
financial projections (the "Projections") were prepared in May 1995 by
management of the Company in a manner consistent with the special purpose
valuation reports prepared by Kenneth Leventhal and the valuations prepared by
Houlihan Lokey, based on assumptions considered reasonable by the management of
the Company, but SUCH PROJECTIONS DO NOT REFLECT A BUSINESS PLAN. NO BUSINESS
PLAN HAS BEEN APPROVED AS OF THE DATE THESE PROJECTIONS WERE PREPARED. THE
PROJECTIONS ASSUME THAT THE PREPACKAGED PLAN WILL BE APPROVED AND IMPLEMENTED
IN ACCORDANCE WITH ITS TERMS. See "Summary--Purposes of the Restructuring" and
"--Effect of the Prepackaged Plan" and "The Prepackaged Plan." The Projections
assume the Company is operated on a "going concern" basis with only a limited
number of assets liquidated in the ordinary course of business. IT DOES NOT
CONTEMPLATE AN ORDERLY LIQUIDATION STRATEGY. If the Prepackaged Plan is
approved, the new reorganized Board of Trustees and its management will be
responsible for the preparation of a business plan, the results of which may
differ materially from those projected herein. As a result, management and the
Board of Trustees of the Company caution that NO REPRESENTATION CAN BE MADE
WITH RESPECT TO THE ACCURACY OF THESE PROJECTIONS OR THE ABILITY OF THE COMPANY
TO ACHIEVE THE PROJECTED RESULTS.     
   
  The following projected balance sheets, statements of operations and
statements of cash flow are based upon many assumptions, including, without
limitation, assumptions relating to industry performance, general business and
economic conditions and the assumption that excess cash flow will be used to
prepay debt and not to pay dividends except to the extent required to retain
REIT status under the Internal Revenue Code. The Projections are only
estimates, and actual results may vary considerably from the Projections. In
addition, uncertainties that are inherent in the Projections increase for later
years in the projection period due to the increased difficulty associated with
forecasting levels of economic activity and corporate performance at more
distant points in the future. Holders are cautioned not to place undue reliance
on the Projections.     
   
  After the Effective Date, the reorganized Board of Trustees may, within the
limitations of the New Senior Note Indenture, adopt a different policy and
there can be no assurance that any of these assumptions can be met. As a
result, there can be no assurance that the future performance of the
reorganized Company will not be materially different than projected herein. The
future performance of the Company's portfolio of assets will be subject to
prevailing economic conditions including the future performance of the real
estate market, the availability of financing in the real estate market and
other factors beyond the control of the Company.     
   
  The Projections were not prepared with a view towards compliance with the
published guidelines of the American Institute of Certified Public Accountants
regarding financial projections. The Projections have not been reviewed,
examined or compiled by the Company's independent auditors or any other
independent certified public accountants or by Houlihan Lokey or Kenneth
Leventhal. The Company does not, in the normal course of its business, prepare
multi-year projections as to future revenues or earnings. Accordingly, the
Company does not intend to update or otherwise revise the Projections to
reflect circumstances existing since the date of their preparation in May of
1995 or to reflect the occurrence of unanticipated events. Furthermore, the
Company does not intend to update or revise the Projections to reflect changes
in general economic or industry conditions.     
   
  For purposes of the Projections, the effective date of the Prepackaged Plan
is assumed to occur as of September 30, 1995. Projections through 2000 are
based upon economic assumptions used by the Company for each year during the
projection period and are included in the notes to the projected financial
statements.     
   
  See Note 2--"Accounting Treatment" for a discussion of "fresh start"
accounting principles used by the Company in preparing the Projections. The
Projections should be read together with the information contained in "Pro
Forma Financial Information," "Accounting Treatment" and "Business" and the
Company's financial statements referred to under "Additional Information
Concerning the Company."     
 
                                       73
<PAGE>
 
                           MORTGAGE AND REALTY TRUST
                       UNAUDITED PROJECTED BALANCE SHEET
                                AT SEPTEMBER 30,
                             (DOLLARS IN THOUSANDS)
 
<TABLE>   
<CAPTION>
                                  1996     1997     1998      1999      2000
                                -------- -------- --------  --------  --------
<S>                             <C>      <C>      <C>       <C>       <C>
Assets
Mortgage loans--net............ $ 49,165 $ 44,886 $ 41,714  $ 36,436  $ 18,578
Real estate owned--net.........  163,104  158,659  154,606   151,363   146,514
Allowance for losses...........        0        0        0         0         0
                                -------- -------- --------  --------  --------
Invested assets................  212,269  203,545  196,320   187,799   165,092
Cash and cash equivalents......    8,039    8,255    6,545     5,682     6,022
Interest receivable and other
 assets........................    4,778    4,778    4,778     4,778     4,778
                                -------- -------- --------  --------  --------
Total Assets................... $225,086 $216,578 $207,643  $198,259  $175,892
                                ======== ======== ========  ========  ========
Liabilities
New Senior Notes............... $ 86,419 $ 69,084 $ 50,704  $ 31,880  $      0
Loan on equity investment......   13,899   13,826   13,746    13,657    13,556
Accounts payable and accrued
 expenses......................    3,514    3,514    3,514     3,514     3,514
                                -------- -------- --------  --------  --------
Total Liabilities..............  103,832   86,424   67,964    49,051    17,070
                                -------- -------- --------  --------  --------
Shareholders' equity
Reorganized capital............  115,889  115,889  115,889   115,889   115,889
Retained earnings..............    5,365   14,265   26,158    39,785    56,410
Cumulative dividends paid......        0        0   (2,368)   (6,466)  (13,477)
                                -------- -------- --------  --------  --------
Total Shareholders' Equity.....  121,254  130,154  139,679   149,208   158,822
                                -------- -------- --------  --------  --------
Total Liabilities and Share-
 holders' Equity............... $225,086 $216,578 $207,643  $198,259  $175,892
                                ======== ======== ========  ========  ========
</TABLE>    
 
                             SEE ACCOMPANYING NOTES
 
                                       74
<PAGE>
 
                           MORTGAGE AND REALTY TRUST
                  UNAUDITED PROJECTED STATEMENT OF OPERATIONS
                        FISCAL YEARS ENDED SEPTEMBER 30
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>   
<CAPTION>
                                         1996    1997    1998    1999    2000
                                        ------- ------- ------- ------- -------
<S>                                     <C>     <C>     <C>     <C>     <C>
Income
Interest and fee income on mortgage
 loans................................. $ 6,512 $ 6,517 $ 6,292 $ 5,860 $ 4,428
Net operating income from real estate
 owned.................................  21,856  23,252  24,113  24,376  25,816
Interest on short-term investments.....     703     626     611     564     622
                                        ------- ------- ------- ------- -------
  Total Income.........................  29,071  30,395  31,016  30,800  30,866
                                        ------- ------- ------- ------- -------
Expenses
Interest...............................  12,614  10,498   8,418   6,402   3,232
Depreciation and amortization on real
 estate owned..........................   7,892   7,997   7,805   7,971   8,309
Provision for losses...................       0       0       0       0       0
Other operating expenses...............   3,200   3,000   2,900   2,800   2,700
                                        ------- ------- ------- ------- -------
  Total Expenses.......................  23,706  21,495  19,123  17,173  14,241
                                        ------- ------- ------- ------- -------
Net Income............................. $ 5,365 $ 8,900 $11,893 $13,627 $16,625
                                        ======= ======= ======= ======= =======
Dividend distributions................. $     0 $     0 $ 2,368 $ 4,098 $ 7,011
                                        ======= ======= ======= ======= =======
Earnings per share (based upon
 11,226,215 shares outstanding)........ $  0.48 $  0.79 $  1.06 $  1.21 $  1.48
</TABLE>    
 
                             SEE ACCOMPANYING NOTES
 
                                       75
<PAGE>
 
                           MORTGAGE AND REALTY TRUST
                  UNAUDITED PROJECTED STATEMENT OF CASH FLOWS
                        FISCAL YEARS ENDED SEPTEMBER 30
                             (DOLLARS IN THOUSANDS)
 
<TABLE>   
<CAPTION>
                                 1996     1997     1998     1999     2000
                                -------  -------  -------  -------  -------
<S>                             <C>      <C>      <C>      <C>      <C>      <C>
Operating activities
Net income....................  $ 5,365  $ 8,900  $11,893  $13,627  $16,625
(Decrease) increase in de-
 ferred income on mortgage 
 loans........................     (123)     397        0    (370)    (226)
Depreciation/amortization.....    7,892    7,997    7,805    7,971    8,309
                                -------  -------  -------  -------  -------
Net cash provided by operating
 activities...................   13,134   17,294   19,698   21,228   24,708
                                -------  -------  -------  -------  -------
Investing activities
Investments in real estate
 owned........................   (9,163)  (3,552)  (3,752)  (4,728)  (3,460)
Mortgage loan advances........        0        0        0        0        0
Sale of real estate owned.....    6,847        0        0        0        0
Principal repayments on mort-
 gage loans...................    9,577    3,882    3,172    5,648   18,084
                                -------  -------  -------  -------  -------
Net cash provided by (used in)
 investing activities.........    7,261      330     (580)     920   14,624
                                -------  -------  -------  -------  -------
Cash flow from financing ac-
 tivities
Repayment of New Senior Notes
 due 2002.....................  (23,581) (17,335) (18,380) (18,824) (31,880)
Repayment of loan on equity
 investment...................      (65)     (73)     (80)     (89)    (101)
Dividends.....................        0        0   (2,368)  (4,098)  (7,011)
                                -------  -------  -------  -------  -------
Net cash used in financing ac-
 tivities.....................  (23,646) (17,408) (20,828) (23,011) (38,992)
                                -------  -------  -------  -------  -------
Net increase (decrease) in
 cash equivalents.............   (3,251)     216   (1,710)   (863)      340
Cash and cash equivalents at
 beginning of period..........   11,290    8,039    8,255    6,545    5,682
                                -------  -------  -------  -------  -------
Cash and cash equivalents at
 end of period................  $ 8,039  $ 8,255  $ 6,545  $ 5,682  $ 6,022
                                =======  =======  =======  =======  =======
Supplemental Schedule of Non-
 Cash Investing Activities
Transfer of mortgage loans to
 real estate owned............  $26,481  $     0  $     0  $     0  $     0
                                =======  =======  =======  =======  =======
</TABLE>    
 
                             SEE ACCOMPANYING NOTES
 
                                       76
<PAGE>
 
                    NOTES TO PROJECTED FINANCIAL STATEMENTS
 
  1. THE PREPACKAGED PLAN. See "The Prepackaged Plan" and "Description of New
Senior Notes" for a discussion of the terms and conditions of the Restructuring
and the New Senior Notes and the proposed treatments of holders of Outstanding
Notes. The projections assume that excess cash is used to optionally redeem
outstanding New Senior Notes and thereby reduce the outstanding principal
amount of New Senior Notes except to the extent needed to pay dividends in
order to maintain REIT status under the Internal Revenue Code.
 
  2. ACCOUNTING TREATMENT. See "Accounting Treatment" for a discussion of how
the Company proposes to account for the Restructuring.
 
  3. MORTGAGE LOAN AND REAL ESTATE OWNED PORTFOLIO.
 
  In preparing the projections, each mortgage loan was individually analyzed
taking into account property type, property location, building age and
condition, leasing, local market conditions, and other pertinent factors,
including but not limited to environmental factors.
   
  In determining the projected payoff dates for the Company's mortgage loans,
external factors such as the current state of the real estate markets in which
the properties are located, as well as the amount of potential refinancing
dollars for each property available to take out the Company's current loan
balances, were taken into account. As a result, those loans that are not
projected to payoff are either assumed extended beyond their contractual
maturity date or foreclosed upon. The projection assumes that all earning loans
remain current on their monthly interest payments throughout the five-year
period.     
   
  Each property owned by the Company was analyzed using similar criteria
employed in reviewing the mortgage loan portfolio. Specific analysis of current
rent rolls and projected leasing assumptions determined projected amounts for
capital expenditures for items such as building improvements, tenant
improvements and leasing commissions. Current market conditions were taken into
account in determining rental rates for vacant space which is assumed to be
leased during the five-year projection. Two owned properties are projected to
be sold in fiscal 1996; in addition, several land sales are projected to occur
in fiscal 1996. No other real estate owned is projected to be sold during the
remainder of the projection.     
   
  4. NEW INVESTMENTS. No new investments have been assumed during the five-year
projections. The projection assumes that excess cash flow will be utilized to
prepay the New Senior Notes.     
 
  5. PROVISION FOR LOSSES: GAINS OR LOSSES ON SALES
   
  No provision for losses are assumed during the five-year projection.     
 
  Mortgage loan payoffs and real estate asset sales are liquidated at the
values established under "fresh start" accounting. As a result, no gains or
losses are projected from sales of real estate or from mortgage loan payoffs.
   
  6. DIVIDENDS/TAXABLE INCOME. The New Senior Note Indenture will restrict the
payment of dividends, other than such declaration and making of dividend
payments that the Company deems necessary to preserve its status as a REIT,
unless the consolidated net worth of the Company at the time of such payment
and after giving effect thereto is at least $50 million; provided, however,
that the Company shall in no event declare or make any such dividend payment or
other distribution if a default or event of default under the New Senior Note
Indenture has occurred and is continuing. Under the Internal Revenue Code, the
Company must distribute 95% of its "REIT taxable income" to its shareholders to
continue to qualify as a REIT. See "Certain Federal Income Tax Consequences--
REIT Status and Taxation of Company Under the Prepackaged Plan--Annual REIT
Distribution Requirements." Taxable income required to be distributed will be
materially less than generally accepted accounting principles ("GAAP")
accounting     
 
                                       77
<PAGE>
 
   
income due to differences related to depreciation, use of NOLs and timing
differences related to bad debt deductions. It is assumed in the projections
that the Company will use NOLs (subject to limitations under section 382 of the
Internal Revenue Code) to reduce taxable income. See "Certain Federal Income
Tax Consequences--Additional Tax Consequences to the Company from the
Prepackaged Plan." Notwithstanding the foregoing, the Company expects that the
new reorganized Board of Trustees will, when appropriate, declare and cause
dividends to be made to holders of Common Shares.     
   
  7. OTHER OPERATING EXPENSES. Other operating expenses are based upon 1.25% of
invested assets at the beginning of each fiscal year.     
 
  8. INVESTMENT INCOME. The projections assume that excess cash is invested in
commercial paper rated A-1/P-1 or better, with a rate of 5.75% throughout the
projection period.
 
  9. OTHER ASSETS. Other assets include accounts receivable, accrued interest
receivable and prepaid assets. It is assumed these amounts remain constant
throughout the projection period.
   
  10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES. It is assumed that these amounts
remain constant throughout the projection period.     
 
  11. SHAREHOLDERS' EQUITY. Retained earnings increase throughout the
projection period due to differences between GAAP accounting income and taxable
income (discussed in Note 5). These differences, which are material, allow the
Company to retain earnings and thus the required dividend distributions are
projected to be less than GAAP accounting income. It should be noted that
retained earnings could decline significantly from the figures shown in the
projection if (1) the projected rental rates and/or projected occupancy levels
are not achieved resulting in lower cash flow, (2) there is an increase in the
level of non-performing mortgage loans, or (3) additional provisions for losses
are incurred above the levels projected.
 
                                       78
<PAGE>
 
                              ACCOUNTING TREATMENT
   
  The Company proposes to account for the Restructuring using the principles of
"fresh start" accounting as required by Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-
7"). Pursuant to such principles, in general, the Company's assets and
liabilities will be revalued. The assets will be stated at their
"Reorganization Value" which is defined as value of the Company on a going
concern basis following the Restructuring. The Company based its Reorganization
Value on the midpoint of the going concern valuation prepared by Kenneth
Leventhal as of March 31, 1995. The liabilities will be stated at their fair
value. The difference between the Reorganization Value of the assets and the
fair value of the liabilities will be recorded as stockholders' equity with
retained earnings restated to zero.     
       
                        PRO FORMA FINANCIAL INFORMATION
   
  The following unaudited pro forma statement of operations for the year ended
September 30, 1994, and the six months ended March 31, 1995, were prepared as
if consummation of the Prepackaged Plan had occurred at October 1, 1993. The
unaudited pro forma balance sheet as of March 31, 1995, was prepared as if the
consummation of the Prepackaged Plan had occurred as of March 31, 1995. The
adjustments set forth in the unaudited Pro Forma Statement of Operations for
the year ended September 30, 1994 and the six months ended March 31, 1995, and
the unaudited Pro Forma Balance Sheet as of March 31, 1995, under the caption
"Proposed Reorganization," reflect the assumed effects of the Restructuring.
The adjustments set forth in the unaudited Pro Forma Balance Sheet as of March
31, 1995, under the caption "Fresh Start" reflect the assumed effects of the
adoption of the "fresh start" accounting prescribed by SOP 90-7. The unaudited
pro forma financial information should be read in conjunction with the
financial statements of the Company and the related notes thereto referred to
under "Additional Information Concerning the Company" and management's
discussion thereof contained elsewhere in this Disclosure Statement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In management's opinion, all adjustments necessary to reflect the
effects of the Restructuring and "fresh start" accounting have been included.
The unaudited pro forma balance sheet is not necessarily indicative of what the
actual financial position would have been at March 31, 1995, nor does it
purport to represent the future financial position of the Company. The
unaudited pro forma statement of operations is not necessarily indicative of
what the actual financial results of the Company would have been for the year
ended September 30, 1994, and the six months ended March 31, 1995, nor does it
purport to represent the future financial results of the Company.     
 
                                       79
<PAGE>
 
                            PRO FORMA BALANCE SHEET
                              
                           AS OF MARCH 31, 1995     
                                  (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                           PROPOSED        FRESH         PRO
                            HISTORICAL  REORGANIZATION     START        FORMA
                            ----------  --------------   ---------     --------
                                       (DOLLARS IN THOUSANDS)
<S>                         <C>         <C>              <C>           <C>
Assets
 Cash and marketable        $  73,140     ($ 60,000)(A)                $ 11,267
 securities..............
                                                  0 (B)
                                             (1,873)(C)
 Loans and owned real
 estate, net.............     287,418                    ($ 66,218)(F)  221,200
 Interest receivable and
 other assets............       6,390                       (2,690)(G)    3,700
                            ---------     ---------      ---------     --------
   Total assets..........   $ 366,948     ($ 61,873)     ($ 68,908)    $236,167
                            =========     =========      =========     ========
Liabilities
 Outstanding Notes.......   $ 290,000     ($290,000)(D)                $      0
 New Senior Notes........           0       110,000 (D)                 110,000
 Loan on REO--bank debt..      17,593                                    17,593
 Interest payable........      51,324       (51,324)(D)                       0
 Accounts payable and
 other...................       3,715             0 (B)       (315)(G)    3,400
                            ---------     ---------      ---------     --------
   Total Liabilities.....     362,632      (231,324)          (315)     130,993
                            ---------     ---------      ---------     --------
Shareholders' Equity
 Common stock at par.....      11,226                                    11,226
 Additional paid in
 capital.................     182,375       171,324 (E)   (259,751)(I)   93,948
 Retained earnings
 (deficit)...............    (189,285)       (1,873)(C)    191,158 (H)        0
                            ---------     ---------      ---------     --------
   Total shareholders'
   equity................       4,316       169,451        (68,593)     105,174
                            ---------     ---------      ---------     --------
   Total liabilities and
   shareholders' equity..   $ 366,948     ($ 61,873)     ($ 68,908)    $236,167
                            =========     =========      =========     ========
</TABLE>    
 
                             SEE ACCOMPANYING NOTES
 
                                       80
<PAGE>
 
                   NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
   
ADJUSTMENT TO REFLECT PROPOSED REORGANIZATION     
   
(A) Reflects a $60.0 million payment to creditors being made at implementation
    of the proposed plan (including the $25.0 million payment made on April 11,
    1995 pursuant to the Agreement of Understanding), provided that such
    payment may be increased based upon the amount of cash held by the Company
    in excess of its short-term obligations following confirmation of the
    proposed plan. Note: Cash and marketable securities includes $1.4 million
    of restricted cash related to the Company's termination pay plan and $1.6
    million relating to borrower's deposits.     
 
(B) Reflects cash payments to unsecured creditors totalling $0.
   
(C) Reflects cash payments for reorganization expenses totalling $1.9 million.
           
(D) Reflects the cancellation of Outstanding Notes in the face amount of $290.0
    million and the related interest payable on these notes of $51.3 million
    and the recording of the New Senior Notes due 2002 in the face amount of
    $110.0 million.     
 
(E) Reflects the conversion of amounts previously owed on the Outstanding Notes
    converted to a 97% interest in the common shares of the reorganized Company
    as follows:
 
<TABLE>     
<CAPTION>
                                                                       (DOLLARS
                                                                          IN
                                                                      THOUSANDS)
   <S>                                                                <C>
   Face amount of Outstanding Notes.................................   $290,000
   Interest payable at 3/31/95......................................     51,324
                                                                       --------
   Total amount payable to creditors at 3/31/95.....................    341,324
   Less: New Senior Notes due 2002..................................   (110,000)
   Less: Cash payment to creditors..................................    (60,000)
                                                                       --------
   Amount previously due creditors converted to equity..............   $171,324
                                                                       ========
</TABLE>    
 
ADJUSTMENT TO REFLECT FRESH START ACCOUNTING
 
(F) Reflects adjustment made to carrying value of loans and owned real estate
    to estimated reorganization values.
 
<TABLE>     
<CAPTION>
                                                                    3/31/95
                                                                     AMOUNT
                                                                 --------------
                                                                 ($000 OMITTED)
   <S>                                                           <C>
   Invested assets (mortgage loans and real estate owned)......     $298,449
   Less: Allowances for losses.................................      (11,031)
                                                                    --------
   Invested assets, net of allowance for losses................      287,418
                                                                    --------
   Extrapolated Valuation of Portfolio as of March 31, 1995
    (see Footnote 1 below).....................................      248,500
   Less: Net present value of operating expenses...............      (27,300)
                                                                    --------
                                                                     221,200
                                                                    --------
   Adjustment made to carrying value of invested assets, net...     $ 66,218
                                                                    ========
</TABLE>    
 
                                       81
<PAGE>
 
          
(G) Reflects adjustment made to carrying values of accounts receivable/other
    assets and accounts payable/accrued expenses to adjust to estimated
    reorganization values of $3.7 million and 3.4 million, respectively.     
 
(H) Reflects the adjustment of the retained earnings/deficit to zero required
    by Fresh Start Accounting.
 
(I) Reflects the adjustment of the additional paid in capital as follows:
 
<TABLE>   
<CAPTION>
                                                                      (DOLLARS
                                                                         IN
                                                                     THOUSANDS)
<S>                                                                  <C>
  Adjust deficit to reset to zero (see H)........................... ($191,158)
  Adjustment to carrying value of invested assets (see F)...........   (66,218)
  Adjustment to carrying value of receivables (see G)...............    (2,690)
  Adjustment to carrying value of payables/accrued expenses (see G).       315
                                                                     ---------
                                                                     ($259,751)
                                                                     =========
</TABLE>    
     
  FOOTNOTE 1     
     
  For purposes of determining enterprise value it was assumed that operating
  expenses (G&A) would be incurred at the following levels in the future:
      
<TABLE>          
<CAPTION>
          AMOUNT    FISCAL YEAR
          ------    -----------
        <S>         <C>
        $4,000,000    Year 1
        $3,500,000    Year 2
        $3,000,000    Year 3
        $3,000,000    Year 4
        $3,000,000    Year 5
        $3,000,000    Year 6
</TABLE>    
     
  The valuation of the asset portfolio assumes continued operation of the
  portfolio for several years. Sales and pay-offs of certain assets occur
  throughout the analysis period. Property cash flows, loan payments and
  pay-offs, and reversion amounts (based on normalized capital expenditures
  in the reversion year) were discounted to present value at 12% per year.
  Amounts DO NOT include extraordinary expenses for reorganization or
  litigation.     
     
  The enterprise valuation assumes the portfolio is operated during the
  projection period and that no additional investments are made. An
  alternative enterprise valuation could be presented wherein the proceeds
  from portfolio operations are used for alternative business purposes, i.e.,
  new mortgages, other real estate investments, etc., and general and
  administrative expenses are incurred to sustain such operations. Such
  alternative valuation has not been presented herein.     
     
  The impact of general and administrative expenses has been reflected as a
  direct reduction of total value. The present value of the general and
  administrative expenses was calculated by applying a capitalization rate of
  10% to year 6 stabilized general and administrative expenses and
  discounting both the capitalized, stabilized year 6 expenses and the annual
  expenses at 12%.     
 
                                       82
<PAGE>
 
                       PRO FORMA STATEMENT OF OPERATIONS
                     FOR THE YEAR ENDED SEPTEMBER 30, 1994
                                  (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                           PRO FORMA      PRO
                                               HISTORICAL ADJUSTMENTS    FORMA
                                               ---------- -----------   -------
                                               (AMOUNTS IN THOUSANDS, EXCEPT
                                                      PER SHARE DATA)
<S>                                            <C>        <C>           <C>
Revenue
Interest Income...............................  $ 14,709                $14,709
Real estate owned net operating income........    10,372                 10,372
Investment income.............................     1,238       (494)(J)     744
Other income..................................       131                    131
                                                --------    -------     -------
 Total income.................................    26,450       (494)     25,956
                                                --------    -------     -------
Expenses
Interest expense--Outstanding Notes...........    31,302    (31,302)(K)       0
Interest expense--New Senior Notes............         0     12,238 (K)  12,238
Interest expense--bank debt...................     1,700                  1,700
Provision for losses..........................     2,000     (2,000)(L)       0
Depreciation and amortization.................     5,840       (731)(M)   5,109
Administrative expenses.......................     4,838                  4,838
Reorganization expenses.......................     2,360     (2,360)(N)       0
                                                --------    -------     -------
 Total expenses...............................    48,040    (24,155)     23,885
                                                --------    -------     -------
Net income (loss).............................  $(21,590)   $23,661     $ 2,071
                                                ========    =======     =======
Earnings per share............................  $  (1.92)               $  0.18
Weighted Average Shares Outstanding...........    11,226                 11,226
</TABLE>    
 
                             SEE ACCOMPANYING NOTES
 
                                       83
<PAGE>
 
                       PRO FORMA STATEMENT OF OPERATIONS
                     
                  FOR THE SIX MONTHS ENDED MARCH 31, 1995     
                                  (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                           PRO FORMA      PRO
                                               HISTORICAL ADJUSTMENTS    FORMA
                                               ---------- -----------   -------
                                               (AMOUNTS IN THOUSANDS, EXCEPT
                                                         PER DATA)
<S>                                            <C>        <C>           <C>
Revenue
Interest income...............................   $ 5,181                $ 5,181
Owned real estate net operating income........     7,212                  7,212
Investment income.............................     1,864     (1,253)(O)     611
Other income..................................        47                     47
                                                --------    -------     -------
 Total income.................................    14,304     (1,253)     13,051
                                                --------    -------     -------
Expenses
Interest expense--Outstanding Notes               18,759    (18,759)(P)       0
Interest expense--New Senior Notes                     0      6,119 (P)   6,119
Interest expense--bank debt...................     1,073                  1,073
Provision for losses..........................     3,000     (3,000)(Q)       0
Depreciation & amortization...................     3,486       (681)(R)   2,805
Administrative expenses.......................     2,198                  2,198
Reorganization expenses.......................     1,505     (1,505)(S)       0
                                                --------    -------     -------
 Total expenses...............................    30,021    (17,826)     12,195
                                                --------    -------     -------
Net income (loss).............................  ($15,717)   $16,573     $   856
                                                ========    =======     =======
Earnings per share............................  ($  1.40)               $  0.08
                                                ========                =======
Weighted Average Shares Outstanding...........    11,226                 11,226
</TABLE>    
 
                             SEE ACCOMPANYING NOTES
 
                                       84
<PAGE>
 
             NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
   
PRO FORMA ADJUSTMENTS--9/30/94     
   
(J) Reflects adjustment to investment income based upon a reduced cash position
    of approximately $11.2 million (pre-confirmation cash balance of $73.1
    million less $60.0 million payment to secured creditors and $1.9 million
    payment for reorganization expenses) at an average investment rate of 3.5%
    for fiscal 1994.     
 
(K) Reflects the reversal of interest expense related to the Outstanding Notes
    which were cancelled and the addition of interest expense for the New
    Senior Notes which bear interest at a fixed rate of 11.125%.
 
(L) Reflects the reversal of the $2.0 million provision for losses which would
    be eliminated as a result of the adjustment of invested assets to projected
    restructured value.
 
(M) Reflects the adjustment to depreciation and amortization resulting from the
    reduced basis in owned real estate as a result of the adjustment of
    invested assets to projected restructured value.
 
(N) Reflects the reversal of reorganization expenses of $2.4 million based upon
    the assumption that the Restructuring was completed and no expenses related
    to the restructure were incurred.
   
PRO FORMA ADJUSTMENTS--3/31/95     
   
(O) Reflects adjustment to investment income based upon a reduced cash position
    of approximately $11.2 million (pre-confirmation cash balance of $73.1
    million less $60.0 million payment to secured creditors and $1.9 million
    payment for reorganization expenses) at an average investment rate of 5.75%
    for the six months ended March 31, 1995.     
 
(P) Reflects the reversal of interest expense related to the Outstanding Notes
    which were cancelled and the addition of interest expense for the New
    Senior Notes which bear interest at a fixed rate of 11.125%.
   
(Q) Reflects the reversal of the $3.0 million provision for losses which would
    be eliminated as a result of the adjustment of invested assets to projected
    restructured value.     
   
(R) Reflects the adjustment to depreciation and amortization resulting from the
    reduced basis in owned real estate as a result of the adjustment of
    invested assets to projected restructured value.     
   
(S) Reflects the reversal of reorganization expenses of $1.5 million based upon
    the assumption that the Restructuring was completed and no expenses related
    to the restructure were incurred.     
 
                                       85
<PAGE>
 
                            SELECTED FINANCIAL DATA
   
  The following selected financial data for the five years ended September 30,
1994, are derived from the consolidated financial statements of the Company.
The financial data for the six month periods ended March 31, 1995, and 1994 are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which the
Company considers necessary for fair presentation of the financial position and
the results of operations for these periods. Operating results for the six
months ended March 31, 1995, are not necessarily indicative of the results that
may be expected for the entire year ended September 30, 1995. The data should
be read in conjunction with the consolidated financial statements and the
related notes referred to in "Additional Information Concerning the Company"
and the other financial information included herein.     
 
<TABLE>   
<CAPTION>
                                                                            SIX MONTHS ENDED
                                   YEARS ENDED SEPTEMBER 30,                    MARCH 31,
                          ------------------------------------------------  ------------------
                            1990      1991      1992      1993      1994      1995      1994
                          --------  --------  --------  --------  --------  --------  --------
                                                                               (UNAUDITED)
                                   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
OPERATING DATA
Total income............  $ 68,233  $ 56,253  $ 42,009  $ 38,342  $ 36,277  $ 19,776  $ 17,266
Interest and operating
 expenses...............    47,601    51,736    42,077    43,967    47,668    27,502    22,824
Depreciation and amorti-
 zation.................     2,391     3,062     4,470     5,500     5,839     3,486     2,833
Income (loss) before
 provision for losses,
 reorganization expenses
 and gain on sales of
 real estate............    18,241     1,455    (4,538)  (11,125)  (17,230)  (11,212)   (8,391)
Provision for losses....    23,790    33,000    32,000    37,000     2,000     3,000        --
Reorganization expenses,
 net....................     5,051     4,352       934     5,844     2,360     1,505     1,417
Gain on sales of real
 estate.................       244       244        --        --        --        --        --
Net loss................   (10,356)  (35,653)  (37,472)  (53,969)  (21,590)  (15,717)   (9,808)
PER SHARE DATA
Net loss................  $   (.94) $  (3.22) $  (3.38) $  (4.87) $  (1.92) $  (1.40) $   (.87)
Dividends declared (1)..       .45       -0-       -0-       -0-       -0-       -0-       -0-
Book value..............     15.23     12.01      8.63      3.71      1.79       .38      2.83
BALANCE SHEET DATA
Total assets............  $595,640  $514,754  $427,268  $353,874  $364,244  $366,948  $359,465
Invested assets.........   547,480   505,600   424,394   347,526   309,477   298,449   327,546
Allowance for losses....    10,792    14,707    19,353    11,808    13,430    11,031    11,050
Creditor Obligations....   403,884   374,000   312,000   290,000   290,000   290,000   290,000
Loans on equity invest-
 ment...................        --        --    15,515    17,572    17,593    17,593    17,593
Shareholders' equity....   168,717   133,064    95,592    41,623    20,033     4,316    31,815
</TABLE>    
- --------
(1) Dividends shown are those attributable to earnings for the period
    indicated.
 
                                       86
<PAGE>
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
LIQUIDITY AND CAPITAL RESOURCES
   
  Due to continued lack of liquidity in the real estate marketplace, the
Company has not been able to meet payment and other obligations on its
outstanding debt. At May 31, 1995, the Company owed $322.9 million in overdue
principal and interest payments on its Outstanding Notes. See "Summary--
Background of the Restructuring" for additional information regarding the
Company's 1991 Plan, current debt service requirements and events of default.
       
  For the six months ended March 31, 1995, cash provided by operating
activities increased the cash balance by approximately $10.4 million. This was
due primarily to an increase in interest payable as no payments were made in
respect of the Outstanding Notes during such period. Cash provided by investing
activities increased the cash balance by approximately $2.4 million. This was
due to higher repayments, net of advances, on (1) mortgage loans of $835,000,
and, (2) in-substance foreclosures of $7.5 million. Offsetting these increases
were advances, net of repayments, on (1) properties acquired through
foreclosure of $2.8 million, (2) real estate equities of $1.3 million, and (3)
investment in partnerships of $1.8 million.     
   
  Under the financial covenants of the Outstanding Note Indenture, the Company
was required to maintain a ratio of outstanding securities to its capital base
(as such terms are defined in the Outstanding Note Indenture) of 515% at March
31, 1993. In addition, under the Outstanding Note Indenture the Company 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 Outstanding Note 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,
and 120% at December 31, 1994, and March 31, 1995. For a more detailed
description of the financial covenants under the Outstanding Note Indenture,
see "Description of Outstanding Notes--Certain Covenants." The Company failed
to meet each of these ratios and such failures constituted events of default
under the Outstanding Note Indenture. On May 26, 1993, the Company received
from the holders of more than 66-2/3% in principal amount of Outstanding Notes
a waiver relating to the March 31, 1993 default. No waivers have been received
with respect to the other events of default. See "The Prepackaged Plan--
Background of the Restructuring--Current Defaults."     
   
  Pursuant to the Outstanding Note Indenture, outstanding securities refers to
the $290 million of Outstanding Notes. Capital base means the amount equal to
the Company's Shareholders' Equity less 50% of non-earning assets. Non-earning
assets means the aggregate of non-earning loans (as defined in the Outstanding
Note Indenture) and non-earning properties (properties that do not produce and
maintain an annualized return of 5% or greater cash flow yield), and earning
assets means an amount equal to between the aggregate amount of invested assets
and aggregate amount of non-earning assets. For a more detailed description of
the definitions of the foregoing terms under the Outstanding Note Indenture,
see "Description of Outstanding Notes--Certain Definitions."     
   
  In April 1995, the Company and certain holders of the Outstanding Notes
executed an agreement of understanding pursuant to which such holders agreed to
support the Restructuring. On April 11, 1995, pursuant to such agreement, the
Company advanced $25 million towards the $50 million minimum payment required
to implement the Restructuring. In the event the Company does not receive the
Requisite Plan Acceptances, the Company will have to consider other
alternatives, including the filing of a voluntary petition under Chapter 11.
The Company does not currently have any agreement with the holders of the
Outstanding Notes precluding such holders, the Outstanding Note Trustee or the
Outstanding Collateral Agent from taking remedial or enforcement action with
respect to the Outstanding Notes, including acceleration of the Outstanding
Notes and foreclosure on the Company's bank accounts and other properties.     
   
  At May 31, 1995, the Company had cash and cash equivalents of $49.0 million.
Included in cash and cash equivalents are $1.3 million of restricted cash,
which represents the funding of the employee retention plan, and $1.2 million
related to borrowers' deposits. The Company's unfunded loan commitments
totalled $617,000 at May 31, 1995.     
 
                                       87
<PAGE>
 
RESULTS OF OPERATIONS
   
  Six months ended March 31, 1995 compared with six months ended March 31,
1994. The Company reported a net loss for the six months ended March 31, 1995
of ($15.7 million) or ($1.40) per share compared to a net loss of ($9.8
million) or ($.87) per share for the six months ended March 31, 1994. The six
months ended March 31, 1995 loss included a provision for losses of $3 million
or $.27 per share compared to no provision for the six months ended March 31,
1994. The Company's spread (interest income on mortgage loans plus net
operating income from real estate owned less interest expense) decreased from
($3.2 million) for the six months ended March 31, 1994 to ($7.4 million) for
the six months ended March 31, 1995. Offsetting these decreases was an increase
in interest income on short-term investments which was $1.86 million for the
six months ended March 31, 1995 compared to $.23 million for the six months
endedMarch 31, 1994.     
   
  Interest and fee income on mortgage loans decreased $2.49 million to $5.18
million for the six months ended March 31, 1995 from $7.66 million for the six
months ended March 31, 1994. The decrease was due primarily to a reduction in
earning mortgage loans (including earning in-substance foreclosures) which
totalled $89.2 million at March 31, 1995 compared to $149.9 million at March
31, 1994. During the six months ended March 31, 1995, there were two mortgage
loans totalling $15.4 million that were transferred into investment in
partnerships. In addition, advances of $1.8 million on investment in
partnerships were made during the period.     
   
  During the six months ended March 31, 1995, no advances were made on mortgage
loans. Prepayment on mortgage loans of approximately $6 million were received
during the six months ended March 31, 1994. There were no prepayments on
mortgage loans received during the six months ended March 31, 1995. The average
interest rate on mortgage loans for the six months ended March 31, 1995 was
7.90% compared to 7.58% for the six months ended March 31, 1994.     
   
  Rental income increased $3.05 million to $11.51 million in the six months
ended March 31, 1995 from $8.47 million for the six months ended March 31,
1994. In addition to rental income, the Company received reimbursement of
certain operating expenses totalling $1.17 million and $.85 million for the six
months ended March 31, 1995 and 1994, respectively. Operating expenses and
depreciation and amortization on rental properties increased $1.4 million to $9
million for the six months ended March 31, 1995 from $7.6 million for the six
months ended March 31, 1994, primarily from continued growth in real estate
equities and properties acquired through foreclosure and held for sale.     
   
  Interest on short-term investments increased due to the continuing
accumulation of available cash. Available cash increased due to no payment of
principal and interest on the Secured Notes since September 30, 1993.     
   
  Interest expense increased $4.37 million to $19.83 million in the current
period from $15.46 million for the six months ended March 31, 1994. This
increase was due primarily to an increase in the average borrowing rate from
10.01% for the six months ended March 31, 1994 to 12.97% for the six months
ended March 31, 1995.     
   
  Other operating expenses decreased $.43 million to $2.2 million for the six
months ended March 31, 1995 from $2.63 million for the six months ended March
31, 1994. The decrease was due to decreases in professional fees and expenses,
insurance costs, trustees expenses and tax (other than income).     
   
  Reorganization expenses related to the Chapter 11 filing and debt
restructuring expenses were $1.5 million for the six months ended March 31,
1995 compared to $1.42 million for the six months ended March 31, 1994. These
expenses reflect professional fees incurred by the representatives of the
creditors, shareholders and the Company.     
          
  Fiscal year ended September 30, 1994 compared with fiscal year ended
September 30, 1993. The Company 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,     
 
                                       88
<PAGE>
 
or $4.87 per share for fiscal 1993. 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.
 
  Interest and fee income on mortgage loans was $14.7 million and $19.0 million
for fiscal 1994 and 1993, respectively. Earning mortgage loans (including
earning in-substance foreclosures) totalled $131.4 million at September 30,
1994 and $168.7 million at September 30, 1993. Non-earning mortgage loans
(including non-earning in-substance foreclosures) totalled $10.2 million at
September 30, 1994 and $22.7 million at September 30, 1993.
 
  Average mortgage loans outstanding (including in-substance foreclosures)
during fiscal 1994 were $172.2 million and for 1993 were $253 million. The
average yield for 1994 was 8.5% and for 1993 was 7.5%.
 
  Interest and fee income for 1994 declined by $4.3 million as compared to
1993. The decline in income is primarily attributable to (1) mortgage loans
repaid totalling $25.5 million in 1994 and (2) transfers of mortgage loans and
in-substance foreclosures to properties acquired through foreclosure and held
for sale which totalled $23.4 million in 1994.
 
  During the quarter ended December 31, 1994, there were two mortgage loans
totalling $15.4 million that were transferred into investment in partnerships.
In addition, advances of $1.7 million on investment in partnerships were made
during the quarter.
 
  Rental income was $18.4 million for fiscal 1994 compared to $17.4 million in
fiscal 1993. In addition to rental income, the Company received reimbursement
of certain operating expenses totalling $1.7 million and $1.6 million for
fiscal 1994 and 1993, respectively. Operating expenses and depreciation and
amortization on rental properties was $15.7 million for both fiscal 1994 and
1993. The increase in income on rental properties resulted 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 and
$237,000 for fiscal 1993. 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 Outstanding Notes since September 30, 1993 and (2) a net
increase of $32.4 million in cash provided by investing activities.
 
  Interest expense increased from $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 9.23% in 1993 to 10.73% in 1994. Offsetting the increase, the average
borrowings decreased from $293.2 million in 1993 to $290 million in 1994. At
September 30, 1994, the blended interest rate on the Outstanding Notes was
12.12%, composed of interest at 11.50% on $200 million of Outstanding Notes
(including default interest at 1%) and 13.50% on $90 million of deferred
amounts of Outstanding Notes (including default interest at 1%). The entire
unamortized costs of restructuring of the Outstanding Notes was charged off
during fiscal 1993 as a result of the monetary default. The Company 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 fiscal 1993. The decrease in other operating expenses was due
primarily to decreases in professional fees and expenses.
 
  Reorganization expenses related to the Prior Bankruptcy Case and debt
restructuring expenses were $2.4 million for the fiscal year ended September
30, 1994, which reflects professional fees incurred by the Creditors'
Committee, the Equity Committee and the Company. 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 Outstanding Notes.
 
                                       89
<PAGE>
 
   
  A $2 million provision for losses was established in fiscal year 1994
compared to a provision of $37 million in 1993. Continued deterioration in many
real estate markets during the past years, the continuing liquidity crisis in
the real estate industry and the Company's requirement to generate cash and
liquidate investments contributed in 1993 to the establishment of a large
provision for losses based on the Company'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.
          
  Fiscal year ended September 30, 1993 compared with fiscal year ended
September 30, 1992. The Company reported a net loss for fiscal 1993 of $54.0
million, or $4.87 per share, compared to a net loss of $37.5 million, or $3.38
per share, for fiscal 1992. The 1993 loss includes a provision for losses of
$37 million, or $3.34 per share, and net expense for reorganization and debt
restructuring items of $5.8 million, or $.53 per share, compared to a provision
for losses of $32.0 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 $19.0 million for fiscal 1993
compared to $26.2 million in fiscal 1992. The decrease results primarily from a
reduction in average mortgage loans (including in-substance foreclosures),
which decreased from $336.3 million in 1992 to $253.0 million in 1993. The
average yield for fiscal 1993 was 2.5% and for fiscal 1992 was 7.8%. The
decrease in average mortgage loans was due to (a) repayment of mortgage loans
(net of advances) of $24.0 million and (b) transfer of $72.0 million of
mortgage loans to foreclosed properties and investments in partnerships.
 
  Rental income was $17.4 million for fiscal 1993 compared to $13.7 million in
fiscal 1992. In addition to rental income, the Company received reimbursement
of certain operating expenses totalling $1.6 million and $1.3 million for
fiscal 1993 and 1992, respectively. Operating expenses and depreciation and
amortization on rental properties increased to $15.7 million for fiscal 1993
compared to $12.3 million for fiscal 1992. The increases in income and expenses
on rental properties results from continued growth in real estate equities and
properties acquired through foreclosure and held for sale.
 
  For fiscal 1993 and 1992, additional interest and fee income was $30,000 and
$26,000, respectively, which was generated from participating in gross income
produced by the properties securing these loans.
 
  Interest expense was $28.5 million in 1993 compared to $29.0 million in 1992
resulting from a decrease in average borrowings from $336.4 million in 1992 to
$293.2 million in 1993. Partially offsetting the decrease, the average
borrowing rate increased from 8.34% in 1992 to 9.23% in 1993. At September 30,
1993, the blended interest rate on the Outstanding Notes was 9.87%, composed of
interest at 9.25% on $200 million of Outstanding Notes (including default
interest at 1%) and 11.25% on $90 million of deferred amounts of Outstanding
Notes (including default interest at 1%). The entire unamortized costs of
restructuring of the Outstanding Notes was charged off during fiscal 1993 as a
result of the monetary default. The Company expensed $3.4 million in fiscal
1993, of which $2.4 million related to the acceleration of costs due to the
June 1993 monetary default. Prior to the default, these costs were being
amortized using the interest method over the term of the debt.
 
  Other operating expenses were $5.3 million for both fiscal 1993 and 1992.
 
  Reorganization expenses related to the Prior Bankruptcy Case and debt
restructuring expenses were $5.8 million for the fiscal year ended September
30, 1993, which reflects professional fees incurred by the Creditors'
Committee, the Equity Committee and the Company and restructuring fees charged
off as a result of the monetary defaults on the Outstanding Notes.
Reorganization expenses were $934,000 for the fiscal year ended September 30,
1992.
 
                                       90
<PAGE>
 
   
  A $37 million provision for losses was established in fiscal year ended
September 30, 1993, compared to a provision of $32 million in fiscal year ended
September 30, 1992. Continued deterioration in many real estate markets during
the past years, the continuing liquidity crisis in the real estate industry and
the Company's requirement to generate cash and liquidate investments
contributed in fiscal 1993 and fiscal 1992 to the establishment of large
provision for losses based on the Company's regular analysis of the portfolio.
       
  Non-earning loans (including non-earning in-substance foreclosures) and non-
earning properties acquired through foreclosure and held for sale were $58.8
million at September 30, 1993, compared to $76.3 million at September 30, 1992.
    
                                       91
<PAGE>
 
                                    BUSINESS
 
GENERAL
   
  The Company is a Maryland real estate investment trust organized in 1970
under the Declaration of Trust. As of May 31, 1995, the Company had available
cash of $46.5 million and invested assets consisting of 34 mortgage loans and
37 investments in real estate located throughout the United States. The Company
is currently managed by a Board of Trustees, comprised of seven trustees, and
has six executive officers, two of whom are also trustees.     
   
  Historically, the Company has engaged in the business of investing in a
portfolio of mortgage loans and real estate. However, since April 12, 1990,
when the Company filed the Prior Bankruptcy Case, the Company has focused its
efforts on generating sufficient liquidity to meet its obligations under the
Prior Plan and the Outstanding Note Indenture and to maximize shareholder
value. To date, liquidity has been generated from operating cash flow as well
as through asset sales and mortgage loan repayments.     
   
  The Company conducts its business so as to qualify as a REIT. Its
approximately 11 million shares are traded on both the NYSE and PSE, and are
owned by approximately 15,000 shareholders. Its portfolio contains
approximately 71 investments in approximately 18 different states. Based upon
the committed amounts of its investments as of March 31, 1995, approximately
49% of the Company's portfolio was in investments in California, 23% in
Pennsylvania and 10% in New England states. Nationally, 38% of the committed
amounts of its investments are in industrial or research and development
properties, 26% in office buildings, 28% in shopping centers, 7% in apartments
and 1% in other types of real estate investments.     
   
  The Company has a variety of investments in income-producing properties
located in or near major metropolitan areas in the United States. These
investments include acquisition and rehabilitation loans with terms of two to
five years. Prior to filing of the Prior Bankruptcy Case, the Company financed
these variable rate loans with variable rate capital, mostly commercial paper.
The Company also made direct investments in real property ("Equities") as well
as in participating loans that share many of the features of pure real estate
Equities. Because real estate Equities and participating loans may have lengthy
holding periods, the Company funded these investments with long-term debt and
equity capital. The Company's investment activities included not only an
initial investment underwriting analysis, but also the ongoing asset management
of its short-term and long-term investments.     
   
  The Company is a limited partner of (1) TPIP II Limited Partnership, a
Washington limited partnership, (2) Paseo Padre Associates, a California
limited partnership, of which MRT West, Inc., a California corporation and
wholly-owned subsidiary of the Company, is a general partner, (3) Creekside
Center Associates, a California limited partnership, of which MRT Creekside,
Inc., a California corporation and wholly-owned subsidiary of the Company, is a
general partner, and (4) Newark C & C Associates, a California limited
partnership, of which MRT Newark, Inc., a California corporation and wholly-
owned subsidiary of the Company, is a general partner. In addition, MRT Santa
Monica, Inc., a California corporation and wholly-owned subsidiary of the
Company, is a general partner of Bay City Holdings, L.P., a California limited
partnership, and 150 Rittenhouse Circle, Inc., a Maryland corporation and
wholly-owned subsidiary of the Company, is a general partner of Keystone
Venture--I, a Pennsylvania general partnership. Each of these partnerships owns
certain real estate on which the Company formerly held a loan.     
   
  The Company was organized in 1970 as PNB Mortgage and Realty Investors
("PNB"), and operated as a REIT located in Pennsylvania until 1979, when it
combined with a California REIT, Sutro Mortgage Investment Trust ("Sutro"). The
combined entity retained the PNB name until 1984 when the name was changed to
"Mortgage and Realty Trust." Both PNB and Sutro engaged in similar business
activities, in that both were active makers of construction and development
loans, although operating in different geographic regions. The combination
provided the combined entity with a sufficient equity capital base to allow it
access to the capital markets on a competitive basis. The Company does not
currently issue commercial paper.     
 
                                       92
<PAGE>
 
INVESTMENTS
   
  Although the Company has continued to fund previously existing investment
commitments, tenant improvements and similar investments necessary to retain or
obtain tenants, the Company has not made any new investments since its Prior
Bankruptcy Case. It does continue, however, to manage its investment portfolio.
The Company's investments include short- and intermediate-term standing loans,
long-term participating loans and investments in real estate equities. See "--
General" above.     
 
  Loans may be secured by first or junior mortgages as well as mortgages
secured by leaseholds. The Company's investments in long-term participating
loans generally permit the Company to receive the following: interest at a
fixed rate; additional interest as a participation in gross income above a
predetermined base rental amount; a portion of the net proceeds upon the sale
or refinancing of the property securing the debt; and an option to convert the
participating loans into an ownership interest. Loans made by the Company are
secured by mortgages on income-producing properties, including office
buildings, shopping centers, industrial projects, apartments and condominium
projects. In making investments, the Company utilized various guidelines
consisting principally of loan-to-value ratios, investment ranges and
percentage of total assets invested in loans to a single borrower.
   
  The Company's investments are primarily located in major metropolitan areas
throughout the United States. As of March 31, 1995, the Company held
investments in mortgage loans, investments in real estate equities and other
interests in real properties located in 18 states.     
   
  Total loans and investment commitments outstanding at March 31, 1995, were
$299,400,000, of which $690,000 remained to be disbursed.     
   
  The following pages contain summaries of the Company's commitments and
investments at March 31, 1995, and certain information pertaining to non-
earning loans, delinquent earning loans, in-substance foreclosures and
foreclosed properties.     
 
                                       93
<PAGE>
 
                           MORTGAGE AND REALTY TRUST
                    
                 SUMMARY OF INVESTMENTS AT MARCH 31, 1995     
 
<TABLE>   
<CAPTION>
                                                                    AMOUNT
                                                AMOUNT COMMITTED OUTSTANDING
                                                ---------------- ------------
<S>                                             <C>              <C>
TYPE OF INVESTMENTS
SHORT AND INTERMEDIATE-TERM
 Mortgage Loans................................   $ 54,863,000   $ 54,373,000
 Properties Acquired Through Foreclosure and
 Held for Sale:
  Earning......................................     72,642,000     72,642,000
  Non-Earning..................................     34,417,000     34,417,000
 In-Substance Foreclosures:
  Earning......................................     30,408,000     30,408,000
  Non-Earning..................................     18,048,000     18,048,000
 Notes Receivable..............................        842,000        642,000
                                                  ------------   ------------
  Total Short and Intermediate-Term............    211,220,000    210,530,000
                                                  ------------   ------------
LONG-TERM
 Participating Loans...........................      2,010,000      2,010,000
 Amortizing Loans..............................      2,719,000      2,719,000
 Investment in Real Estate Equities............     56,940,000     56,940,000
 Investment in Partnerships....................     26,511,000     26,511,000
                                                  ------------   ------------
  Total Long-Term..............................     88,180,000     88,180,000
                                                  ------------   ------------
 Total Invested Assets.........................   $299,400,000    298,710,000
                                                  ============   ------------
 Less Deferred Fees............................                      (261,000)
                                                                 ------------
 Total Invested Assets.........................                  $298,449,000
                                                                 ============
</TABLE>    
 
                           MORTGAGE AND REALTY TRUST
                     NON-EARNING IN-SUBSTANCE FORECLOSURES
               AND NON-EARNING FORECLOSED PROPERTY HELD FOR SALE
                 (BY GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE)
                                 
                              MARCH 31, 1995     
                                 (IN THOUSANDS)
       
<TABLE>   
<CAPTION>
                                              INDUSTRIAL
                                RETAIL CENTER   CENTER   OFFICE BUILDING  TOTAL
                                ------------- ---------- --------------- -------
<S>                             <C>           <C>        <C>             <C>
California.....................    $   --      $18,018        $3,953     $21,971
Massachusetts..................     7,548        5,931            --      13,479
New Hampshire..................        --        5,173            --       5,173
New Jersey.....................        --           --         5,333       5,333
Pennsylvania...................        --        3,012         3,467       6,479
                                   ------      -------       -------     -------
                                   $7,548      $32,134       $12,753     $52,435
                                   ======      =======       =======     =======
</TABLE>    
 
                                       94
<PAGE>
 
                           MORTGAGE AND REALTY TRUST
          
       GEOGRAPHIC DISTRIBUTION OF INVESTMENTS BY COMMITTED AMOUNTS*     
                                 
                              MARCH 31, 1995     
 
<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   1.47%
California...... $   234,631               51,991,487  $17,118,279  $   70,235   $61,800,071  $15,448,626   146,663,329  49.12%
Colorado........                                                                     186,345                    186,345   0.06%
Delaware........                                                       200,190                                  200,190   0.07%
Georgia.........                                                        59,977                                   59,977   0.02%
Indiana.........   4,296,330                                                                                  4,296,330   1.44%
Maine...........   7,605,269                                                                                  7,605,269   2.55%
Maryland........                                         6,822,064     753,479                                7,575,543   2.54%
Massachusetts...                            6,966,038    2,322,563                 7,547,467                 16,836,068   5.64%
Minnesota.......                            2,336,759                                           2,812,959     5,149,718   1.72%
Missouri........   9,022,369                                                                                  9,022,369   3.02%
Nevada..........              $3,060,000                                                                      3,060,000   1.02%
New
 Hampshire......                            6,560,712                                                         6,560,712   2.20%
New Jersey......                                         5,333,713                                            5,333,713   1.79%
Oregon..........                                         7,641,272                                            7,641,272   2.56%
Pennsylvania....                           15,644,930   37,696,622                13,862,363    2,009,867    69,213,782  23.18%
Virginia........                                                       135,505                                  135,505   0.05%
Washington......                            4,633,272                                                         4,633,272   1.55%
                 -----------  ----------  -----------  -----------  ----------   -----------  -----------  ------------ ------
Totals.......... $21,158,599  $3,060,000  $92,517,677  $76,934,513  $1,219,386   $83,396,246  $20,271,452  $298,557,873
                 ===========  ==========  ===========  ===========  ==========   ===========  ===========  ============
Percentage......        7.09%       1.02%       30.99%       25.77%       0.41%        27.93%        6.79%              100.00%
                 ===========  ==========  ===========  ===========  ==========   ===========  ===========               ======
</TABLE>    
- --------
   
*Does not include notes receivable committed amount of $842,000 at 3/31/95.
         
NON-EARNING INVESTMENTS, DELINQUENT EARNING LOANS AND FORECLOSED PROPERTIES
       
  Earning Mortgage Loans More Than 60 Days Delinquent. The Company 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 March 31,
1995, there were no loans which were so delinquent as to principal and/or
interest.     
   
  Non-Earning Mortgage Loans. At March 31, 1995, there was one loan totalling
$25,000 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 the operation or sale of 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 March 31, 1995, there were four loans classified as non-earning
in-substance foreclosed, which totalled $18,018,000. Descriptions of the four
investments are as follows:     
   
(1) The Company has a first mortgage loan on six industrial buildings totalling
    157,480 square feet located in Chula Vista, California. The loan was
    classified as a non-earning in-substance foreclosure in April 1994. The
    property is currently 74% leased and occupied.     
   
(2) The Company 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 a non-earning in-
    substance foreclosure in September 1994. The property is currently 77%
    leased and occupied.     
   
(3) The Company has a first mortgage loan on an industrial building containing
    114,375 square feet located in Santa Monica, California. The loan was
    classified as a non-earning in-substance foreclosure in March 1995. The
    property is currently 96% leased and occupied.     
   
(4) The Company has a first mortgage loan on an industrial building containing
    27,095 square feet located in San Dimas, California. The loan was
    classified as a non-earning in-substance foreclosure in March 1995. The
    property is currently 85% leased and occupied.     
 
                                       95
<PAGE>
 
   
  Non-Earning Properties Acquired Through Foreclosure and Held For Sale. At
March 31, 1995, there were ten non-earning properties acquired through
foreclosure and held for sale, which totalled $34,417,000. Descriptions of the
ten investments are as follows:     
 
(1) The Company had a first mortgage loan on an office/warehouse building
    containing 119,000 square feet located in Hopkinton, Massachusetts. The
    Company acquired title to this property in January 1991. The project is
    currently unleased.
   
(2) The Company had a first mortgage loan on a retail shopping center
    containing 111,339 square feet located in Fairhaven, Massachusetts. The
    Company 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 Company had a first mortgage loan on a 3-story office building
    containing 37,800 square feet located in Piscataway, New Jersey. The
    Company acquired title to this property in August 1991. The project is
    currently 77% leased and occupied.     
 
(4) The Company had a first mortgage loan on an industrial building containing
    57,900 square feet located in Framingham, Massachusetts. The Company
    acquired title to this property in April 1992. The property is currently
    65% leased and occupied.
   
(5) The Company had a first mortgage loan on two adjoining office buildings
    containing 39,087 square feet located in Woodland Hills, California. The
    Company acquired title to this property in May 1992. The property is
    currently 85% leased and occupied.     
 
(6) The Company 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 Company acquired title to
    this property in August 1992. The project is currently 72% leased and
    occupied.
          
(7) The Company had a first mortgage loan on a 4-story office building
    containing 99,666 square feet located in Cherry Hill, New Jersey. The
    Company acquired title to this property in November 1992. The project is
    currently 54% leased and occupied.     
   
(8) The Company had a first mortgage loan on an industrial building containing
    120,000 square feet located in Willow Grove, Pennsylvania. The Company
    acquired title to this property in June 1993. The project is currently
    unleased.     
   
(9) The Company had a first mortgage loan on an industrial building containing
    50,972 square feet located in Canton, Massachusetts. The Company acquired
    title to this property in January 1991. The project is currently 100%
    leased and occupied.     
   
(10) The Company had a first mortgage loan on an office building containing
     49,953 square feet located in Philadelphia, Pennsylvania. The Company
     acquired title to this property in January 1991. The project is currently
     82% leased and occupied.     
 
ALLOWANCE FOR LOSSES
   
  An allowance for losses is maintained based upon the Board of Trustees'
evaluation of the Company's investments. A review of all investments is made
quarterly to determine the adequacy of the allowance for losses. During the six
months ended March 31, 1995, there were additions of $3,000,000 to the
allowance for     
 
                                       96
<PAGE>
 
   
losses and charges of $5,399,000, net of recoveries, against the allowance. The
amount of the allowance for losses at March 31, 1995, was $11,031,000 (3.7% of
the Company's invested assets). For a description of the Company's method of
determining the allowance for losses, see Notes 1 and 3 as set forth under
"Notes to the Financial Statements."     
 
PROPERTIES
 
  The Company'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, Pennsylvania and the New England states.
   
  The Company's real estate portfolio at March 31, 1995 (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      $ 20,924    11%
   Office Buildings.................................     11        54,102    28%
   Industrial Buildings.............................     14        53,233    28%
   Retail Buildings.................................      5        56,236    30%
   Research and Development Buildings...............      2         6,015     3%
                                                        ---      --------   ---
                                                         35      $190,510   100%
                                                        ===      ========   ===
</TABLE>    
   
  The Company does not own any real property for use in connection with its
day-to-day operations. Office space for the Company'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 Company'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 expended for the fiscal year
ended September 30, 1994, for both properties was $345,000. The Company has
become, and may from time to time become, the owner or lessor of real estate in
connection with its investment activities. See "--Investments" above.     
 
LEGAL PROCEEDINGS
 
  A discussion of events surrounding the Company's bankruptcy filing and an
explanation of the material terms of the Company's reorganization under the
1991 Plan are set forth under "Summary--Background of the Restructuring--
Previous Chapter 11 Case and 1991 Plan of Reorganization." The bankruptcy case
relating to the Prior Plan was closed on November 4, 1994 pursuant to a final
order of the Bankruptcy Court.
 
                                       97
<PAGE>
 
                                   MANAGEMENT
   
  The Company is governed by a board of seven trustees who meet at least once a
month, either in Pennsylvania or California. The trustees approve all material
transactions undertaken by the Company. In advance of each meeting of the
trustees, a written agenda is prepared, and each transaction to come before the
trustees is summarized in writing and presented to the trustees for
consideration. Each sale of real estate, loan modification, loan or prepayment
compromise, increase in a loan, and loan workout is submitted for approval by
the trustees.     
   
  The following sets forth certain information regarding the executive officers
and trustees of the Company.     
 
<TABLE>   
<CAPTION>
   NAME                 AGE        POSITIONS AND OFFICES WITH THE COMPANY
   ----                 ---        --------------------------------------
<S>                     <C> <C>
Victor H. Schlesinger.   70 Chairman and Trustee
C.W. Strong, Jr.......   65 President, Chief Executive Officer and Trustee
James A. Dalton.......   52 Executive Vice President and Chief Operating Officer
Daniel F. Hennessey...   54 Treasurer and Chief Financial Officer
Donald W. Burnes, Jr..   45 Senior Vice President
Douglas R. Eckard.....   49 Senior Vice President
Jeffrey M. Bucher.....   62 Trustee
Kent L. Colwell.......   64 Trustee
James M. Gassaway.....   73 Trustee
John E. Krout.........   75 Trustee
Gerhard N. Rostvold...   75 Trustee
</TABLE>    
   
  The officers of the Company 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. Messrs. Schlesinger, Strong, Dalton, Hennessey, Burnes and Eckard
were last elected as officers at such meeting on February 10, 1993, with Mr.
Eckard being promoted to Senior Vice President on August 17, 1993. Messrs.
Schlesinger, Strong, Dalton, Hennessey and Eckard have served as officers of
the Company for more than the past five years. Mr. Burnes was first elected as
an officer of the Company on February 14, 1990. The Company has a total of 26
employees.     
 
  In connection with the Prepackaged Plan, the following persons have been
designated by the Principal Holders to serve on the Board of Trustees:
 
  Carl A. Mayer, Jr., 57, founded The Mayer Group in 1990, an advisor group
offering consulting and marketing expertise and services to real estate
investment companies who are seeking investment capital from the pension fund
community. Mr. Mayer continues to serve as a principal of The Mayer Group.
 
  Martin Bernstein, 58, is a private investor who has been managing family
funds since 1988. Prior to this period, Mr. Bernstein served as the founding
General Partner of Halcyon Investments and Alan B. Slifka & Co., (investments).
Mr. Bernstein also currently serves on the Board of Directors of Astro
Communications and MBO Properties, Inc.
   
  John B. Levy, 47, was an Executive Vice President of Republic Realty Mortgage
Corporation from 1993 to June 1995. Prior to 1993, Mr. Levy acted as the Senior
Vice President of Nationsbanc Mortgage Corporation, and was charged with lender
relations, production of new income property loans and management of the
production offices.     
   
  Richard B. Jennings, 51, is currently the President of Realty Capital
International Inc., a real estate investment banking firm, and has served in
this capacity since 1991. Prior to 1991, Mr. Jennings acted as a Senior Vice
President of Landauer Associates, Inc., a real estate management and advisory
firm based in New York, New York. Mr. Jennings also currently serves on the
board of directors of MBO Properties, Inc.     
 
                                       98
<PAGE>
 
  Richard S. Frary, 47, is currently the founding partner and majority
shareholder of Tallwood Associates, Inc., a private merchant banking firm
specializing in corporate restructurings and real estate, and has served in
this capacity since 1990.
 
  In connection with the Prepackaged Plan, the Principal Holders have chosen
George R. Zoffinger to be the new President and Chief Executive Officer of the
Company. It is anticipated that Mr. Zoffinger will begin his term of office
upon ratification of such term by the Board of Trustees after the Effective
Date. Mr. Zoffinger is forty-seven years old and since April 1994 has served as
Chairman of the Board of Corestates New Jersey National Bank. From December
1991 to April 1994, he served as President and Chief Executive Officer of
Constellation Bankcorp and Constellation Bank. Between March 30, 1990 and
December 1991, Mr. Zoffinger served as the Commissioner for the New Jersey
State Department of Commerce and Economic Development, as well as Chairman of
the Board of the New Jersey Economic Development Authority.
   
  The seventh member of the Board of Trustees will be selected by the New Major
Holder at or before the Effective Date. The foregoing persons have consented to
serve as trustees of the Company.     
 
                             EXECUTIVE COMPENSATION
 
EXECUTIVE COMPENSATION TABLES
 
  The following table provides information about the compensation for the Chief
Executive Officer and the four other most highly compensated officers of the
Company for the fiscal years ended September 30, 1994, 1993, 1992
(collectively, the "Named Executive Officers").
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                        LONG TERM COMPENSATION
                                                                      ---------------------------
                                     ANNUAL COMPENSATION(1)                 AWARDS        PAYOUTS
                             ---------------------------------------- ------------------- -------
                                                         OTHER ANNUAL RESTRICTED OPTIONS/          ALL OTHER
                             FISCAL  SALARY     BONUS    COMPENSATION   SHARES     SARS    LTIP   COMPENSATION
NAME AND PRINCIPAL POSITION   YEAR   ($)(2)      ($)         ($)         ($)       (#)    PAYOUTS    ($)(3)
- ---------------------------  ------ --------  ---------- ------------ ---------- -------- ------- ------------
<S>                          <C>    <C>       <C>        <C>          <C>        <C>      <C>     <C>
C.W. Strong, Jr., Chief       1994  $175,000          --      --          --          --     --      $3,000
Executive Officer.......      1993   175,000          --      --          --          --     --       3,000
                              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...............      1992   177,511   90,000(6)      --          --      25,000     --       3,000
Daniel F. Hennessey,          1994  $129,488  $20,000(5)      --          --          --     --      $3,000
Chief Financial Officer.      1993   124,508      20,000      --          --          --     --       3,000
                              1992   122,038   65,000(6)      --          --      20,000     --       3,000
Donald W. Burnes, Jr.,        1994  $120,595  $30,000(5)      --          --          --     --      $3,000
Senior Vice President...      1993   114,448      30,000      --          --          --     --       3,000
                              1992   113,114   65,000(6)      --          --      15,000     --       3,000
</TABLE>
- --------
(1) In the fiscal year ended September 30, 1993, the Company 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 Company's
    Savings Incentive Plan.
(3) Includes the Company's matching contributions under the Company's Savings
    Incentive Plan. See "Savings Incentive Plan" below.
(4) Represents fees received as Chairman and Trustee.
(5) Does not include bonus for calendar year 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.
 
                                       99
<PAGE>
 
    AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUES
 
  The following table sets forth information with respect to the Outstanding
Stock Rights held by the Named Executive Officers at September 30, 1994. The
Prepackaged Plan provides that Outstanding Stock Rights will be canceled.
 
<TABLE>
<CAPTION>
                                                                                    VALUE OF UNEXERCISED
                         SHARES ACQUIRED                  NUMBER OF UNEXERCISED     IN-THE-MONEY OPTIONS/
                           ON EXERCISE   VALUE REALIZED  OPTIONS/SARS AT FY-END        SARS AT FY-END
          NAME                 (#)            ($)       EXERCISABLE/UNEXERCISABLE EXERCISABLE/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>
 
PENSION PLANS
   
  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 Company who
were formerly employees of GMAC Realty Advisors, Inc. (these employees were
acquired pursuant to a settlement agreement entered into between and among the
Company, GMAC Mortgage Corporation of PA, and GMAC Realty Advisors, Inc.,
which, among other things, transferred the GMAC Realty Advisors, Inc. employees
to the Company). All other employees are eligible to participate in the
Retirement Plan provided that they are at least 21 years of age and have been
employed for twelve consecutive months, during which period the employee has
completed at least 1000 hours of service. Under the Retirement Plan, after
completing five years of service, each eligible employee 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 years 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 years thereof
or (b) 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 15
years 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
years 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 Company'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.
 
                                      100
<PAGE>
 
                               PENSION PLAN TABLE
<TABLE>   
<CAPTION>
                                   YEARS OF CREDITED SERVICE
                       ---------------------------------------------------------
<S>                    <C>         <C>         <C>         <C>          <C>
   AVERAGE OF 5
  HIGHEST ANNUAL         15          20          25           30           35
COMPENSATION LEVELS    -------     -------     -------     --------     --------
- -------------------
     $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 Named Executive Officers 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.
   
TRUSTEE COMPENSATION     
   
  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
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 29, 1989, the trustees adopted a Pension Plan for trustees,
effective October 1, 1989 (as amended on April 5, 1995, and as may be further
amended, the "Pension Plan"). 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. On
April 5, 1995, the pension plan for trustees was amended to provide that should
any trustee's service terminate for any reason within one year after the
Effective Date of the Prepackaged Plan, such terminated trustee shall receive a
one-time single-sum cash payment equal in amount to the net present value of
the maximum aggregate projected benefit obligation of the Company to that
trustee. No other death benefits shall become payable on behalf of any trustee
under the plan.     
 
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 Company. 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 Company
who were formerly employees of GMAC Realty Advisors, Inc. All other     
 
                                      101
<PAGE>
 
employees of the Company 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 Internal Revenue Code
($9,240 in 1994). The Company 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 Company
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
Company'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 when a demonstrable,
immediate and heavy financial need has been shown.
 
EMPLOYEE RETENTION PLAN
   
  The trustees adopted an Employee Retention Plan (the "Retention Plan"), dated
October 17, 1990, as amended January 16, 1991, March 20, 1991 and March 15,
1995, designed to provide a financial incentive for key employees to
successfully restructure the organization and maximize the net worth of the
Company. The Retention Plan was approved in connection with the 1991 Plan by
the Bankruptcy Court by order dated February 26, 1991 and will remain in effect
after the Confirmation Date of the Prepackaged Plan.     
 
  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 Company as of February 27, 1991 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
that will remain in effect during the period ending on the later of (i) the
date that the obligations (including, without limitation, interest accrued from
and after January 31, 1991) payable by the Company to or for the benefit of any
creditor holding a Class 3 Claim, which is defined under the Prior Plan as an
Unsecured Claim that is also an Allowed Claim pursuant to the Prior Plan or the
Outstanding Collateral Agreement (collectively, the "Class 3 Creditor
Obligations") are no longer outstanding, (ii) the maturity date of the New
Senior Notes or (iii) the date on which the New Senior Notes are repaid in full
(the "Effective Period"). Any eligible employee who is terminated without cause
during this period will 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 Company. 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 the
Retention Plan. The benefits that may be payable under the Retention Plan have
been funded in a separate trust.     
 
  The second portion of the Retention Plan included a retention bonus plan that
provided for the aggregate payment of up to $350,000 to employees who remained
in the employ of the Company until February 27, 1992, a period of one year from
the date of the confirmation of the 1991 Plan. A separate trust was funded for
the payment of these benefits and they were paid to the employees on February
28, 1992.
 
  The third portion of the Retention Plan provided for the grant, under the
Company's 1984 Share Option Plan, of non-qualified stock options for up to an
aggregate of 200,000 shares of Common Stock 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
Company's Common Stock on the NYSE for the
 
                                      102
<PAGE>
 
last five days of the 30 day period after the effective date of the 1991 Plan
and (ii) the fair market value of the Common Stock 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
Company must exercise within a three month period after resignation. If a
change in control of the Company occurs, all options which have not previously
been forfeited will vest immediately. All options granted prior to the
Effective Date of the Prepackaged Plan will be cancelled under the Prepackaged
Plan. See "The Prepackaged Plan."
   
  The final portion of the Retention Plan is an incentive program which may
provide total incentive payments during the Effective Period 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
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
were reduced below that amount. Eliminated from this calculation were voluntary
repayments by the Company 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 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 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 Notes. Under this incentive program,
because the Outstanding 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.     
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  Messrs. Bucher, Colwell, Gassaway, Krout and Rostvold served as members of
the Company's Compensation and Nominating Committee during the Company's fiscal
year ended September 30, 1994. None of such individuals was, during such fiscal
year, an officer or employee of the Company, was formerly an officer of the
Company or had any relationship requiring disclosure by the Company.
 
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.
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 Company. See "--Employee Retention
Plan."     
   
INDEMNIFICATION     
   
  The trustees and officers of the Company are entitled to indemnification
under certain circumstances pursuant to the Declaration of Trust. The Company
is not aware of any pending legal proceedings for which any such person would
be entitled to indemnification.     
 
                                      103
<PAGE>
 
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
CURRENT HOLDERS
   
  The following table sets forth information at May 31, 1995, with respect to
the beneficial ownership of shares of the Outstanding Common Shares by each
Named Executive Officer and Trustee of the Company and by all Officers and
Trustees as a group. The information set forth below is based upon filings with
the Commission, the Company's share records, and information obtained by the
Company from the persons named below. As of May 31, 1995, no individual Trustee
or officer had beneficial ownership of 1% or more of the Outstanding Common
Shares and all Trustees and officers as a group beneficially owned 3.4% of the
Outstanding Common Shares. To the Company's knowledge, as of May 31, 1995, 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 Outstanding Common
Shares of the Company.     
 
<TABLE>     
<CAPTION>
                                                                  NUMBER OF
                                                                COMMON SHARES
                                                                BENEFICIALLY
   NAME BENEFICIAL OWNER(1)                                         OWNED
   ------------------------                                     -------------
   <S>                                                          <C>
   Victor H. Schlesinger.......................................     32,038(2)
   C.W. Strong, Jr.............................................     29,914(3)
   Jeffrey M. Bucher...........................................      8,600(4)
   Kent L. Colwell.............................................     11,650(4)(5)
   James M. Gassaway...........................................     13,302(4)
   John E. Krout...............................................      8,612(4)
   Gerhard N. Rostvold.........................................     10,648(4)
   James A. Dalton.............................................     71,880(6)(7)
   Daniel F. Hennessey.........................................     50,569(8)
   Donald W. Burnes, Jr........................................     35,000(9)
   All Officers and Trustees as a group (20 persons)...........    379,263(10)
</TABLE>    
- --------
   
 (1) The address of all Named Executive Officers is in the care of the Company.
            
 (2) 23,500 of the shares reported as beneficially owned by Mr. Schlesinger are
     obtainable upon exercise of options. Such options will be canceled without
     consideration under the Prepackaged Plan.     
   
 (3) 25,000 of the shares reported as beneficially owned by Mr. Strong are
     obtainable upon exercise of options. Such options will be canceled without
     consideration under the Prepackaged Plan.     
   
 (4) 7,500 of the shares reported as beneficially owned by Messrs. Bucher,
     Colwell, Gassaway, Krout and Rostvold are obtainable upon exercise of
     options. Such options will be canceled without consideration under the
     Prepackaged Plan.     
   
 (5) 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.     
   
 (6) 65,000 of the shares reported as beneficially owned by Mr. Dalton are
     obtainable upon exercise of options. Such options will be canceled without
     consideration under the Prepackaged Plan.     
   
 (7) 450 of the shares reported as beneficially owned by Mr. Dalton are owned
     by Mr. Dalton's wife.     
   
 (8) 50,000 of the shares reported as beneficially owned by Mr. Hennessey are
     obtainable upon exercise of options. Such options will be canceled without
     consideration under the Prepackaged Plan.     
   
 (9) All of the shares reported as beneficially owned by Mr. Burnes are
     obtainable upon exercise of options. Such options will be canceled without
     consideration under the Prepackaged Plan.     
   
(10) Includes 242,004 shares reported as beneficially owned by Trustees and
     Named Executive Officers as described in the footnotes above and 102,500
     shares obtainable upon exercise of options by officers of the Company who
     are not named in the foregoing table. Such options will be canceled
     without consideration under the Prepackaged Plan.     
 
 
                                      104
<PAGE>
 
CERTAIN HOLDERS AFTER RESTRUCTURING
   
  As of May 31, 1995, Mutual Series Funds is the beneficial owner of
Outstanding Notes with an aggregate principal amount of $133.8 million (46.1%).
Immediately upon consummation of the Restructuring, Mutual Series Funds will
beneficially own approximately 5.0 million Common Shares (44.7%). Fidelity
Investments, including its affiliates, is the beneficial owner of Outstanding
Notes with an aggregate principal amount of $45.0 million (15.5%). Immediately
upon consummation of the Restructuring, Fidelity Investments will beneficially
own approximately 1.7 million Common Shares (15.0%). Intermarket Corporation,
including its affiliates, is the beneficial owner of Outstanding Notes with an
aggregate principal amount of $44.3 million (15.3%). Immediately upon
consummation of the Restructuring, Intermarket Corporation will beneficially
own approximately 1.7 million Common Shares (14.8%). Angelo Gordon & Co., L.P.,
including its affiliates, is the beneficial owner of Outstanding Notes with an
aggregate principal amount of $27.8 million (9.6%). Immediately upon
consummation of the Restructuring, Angelo Gordon & Co., L.P. will beneficially
own approximately 1.0 million Common Shares (9.3%). Strome Susskind & Co.,
including its affiliates, is the beneficial owner of Outstanding Notes with an
aggregate principal amount of $14.9 million (5.3%). Immediately upon
consummation of the Restructuring, Strome Susskind & Co. will beneficially own
approximately 558,941 Common Shares (5%).     
 
                                      105
<PAGE>
 
                         MARKET AND TRADING INFORMATION
 
COMMON SHARES
   
  The Outstanding Common Shares are listed for trading on the NYSE and the PSE
under the symbol MRT. The following table shows the high and low sales prices
per share of Outstanding Common Shares on the NYSE for the first two quarters
of the current fiscal year and for each quarter of the two fiscal years ending
September 30, 1993, and September 30, 1994, respectively. There were no
dividends declared attributable to such quarters. The last reported sales price
of Outstanding Common Shares on the NYSE for June 2, 1995, the last practicable
date on which such information was available prior to the date of this
Disclosure Statement, was $.25. The last reported sales price of Outstanding
Common Shares on the NYSE for November 16, 1994, the last trading day before
the Company announced that it had reached an agreement in principle relating to
the Restructuring with the Creditors' Committee, was $.25. At the close of
business May 31, 1995, there were approximately 15,000 record holders of
Outstanding Common Shares. The following table sets forth the high and low
sales prices for each fiscal quarter during the past two years. There were no
dividends paid during any such quarter.     
 
<TABLE>     
<CAPTION>
                                                                    HIGH   LOW
                                                                   ------ ------
   <S>                                                             <C>    <C>
   1995
    First Quarter................................................. $  3/8 $  1/8
    Second Quater.................................................    1/4    1/8
   1994
    First Quarter................................................. $  5/8 $  3/8
    Second Quarter................................................    5/8    3/8
    Third Quarter.................................................    1/2    3/8
    Fourth Quarter................................................    1/2    1/4
   1993
    First Quarter................................................. $1-3/8 $  7/8
    Second Quarter................................................  2-1/2  1-1/4
    Third Quarter.................................................  1-7/8    3/8
    Fourth Quarter................................................    7/8    3/8
</TABLE>    
 
  In a letter dated November 29, 1994, the NYSE notified the Company that in
light of the Company's present financial condition as well as its intention to
file a prepackaged plan of reorganization under Chapter 11 of the Bankruptcy
Code, the NYSE is reviewing the continued listing of the Company. Although the
Company is working with representatives of the NYSE to allow the Company to
continue to be listed, there can be no assurance that the NYSE will not
determine to commence a formal delisting action. As a result, there can be no
assurance that the Common Shares will be accepted for listing on the NYSE upon
or after consummation of the Restructuring or that an active trading market for
the Common Shares will develop. See "Special Factors and Certain
Considerations--Absence of Public Market."
   
  The Company has not paid any dividends on the Outstanding Common Shares since
February 20, 1990. The payment of dividends or other distributions to
shareholders is restricted under the Outstanding Note Indenture to dividends
required for the Company to maintain its REIT status and inadvertent
overpayments of such dividends. The New Senior Note Indenture also restricts
the payment of dividends and other distributions to shareholders on the Common
Shares or any preferred stock which may be issued by the Company, other than
such declaration and making of dividend payments that the Company deems
necessary to preserve its status as a REIT, unless the consolidated net worth
of the Company at the time of such payment and after giving effect thereto is
at least $50.0 million; provided, however, that the Company shall in no event
declare or make any such dividend payment or other distribution if a default or
event of default under the New Senior Note Indenture has occurred and is
continuing. In addition, the New Senior Note Indenture provides that the
Company may not purchase, redeem or otherwise acquire for value its Common     
 
                                      106
<PAGE>
 
   
Shares or any preferred stock of the Company, whether outstanding on the
Effective Date or thereafter issued and outstanding, unless the Consolidated
Net Worth (as defined in the New Senior Note Indenture) of the Company at the
time of such purchase, redemption or other acquisition and after giving effect
thereto is at least $50 million; provided, however, that the Company shall in
no event make any such purchase, redemption or other acquisition if a Default
or Event of Default (as respectively defined in the New Senior Note Indenture)
has occurred and is continuing. See "Special Factors and Certain
Considerations--Restricted Payments."     
 
  The Company incurred net operating losses of approximately $38 million, $31
million and $12 million for federal income tax purposes in fiscal 1993, 1992
and 1991, respectively, each of which will be available as a loss carryforward
to future years' taxable income, subject to the limitations imposed by Section
382 of the Internal Revenue Code and the effects of the Restructuring. The
Company estimates a net operating loss for tax purposes of approximately $35
million in fiscal 1994. To the extent that the loss carryforward used in future
years eliminates taxable income, no dividend distribution will be required as a
condition to preserving REIT status.
 
OUTSTANDING NOTES
   
  There is not any active trading market for the Outstanding Notes. These
securities are traded over the counter by certain dealers that are from time to
time willing to effect transactions in these securities. Prior to April 1993,
trading in these securities was extremely limited and sporadic. From April 1993
through May 26, 1995, approximately $429.5 million in principal amount of
Outstanding Notes were traded in approximately 86 trades. Meaningful
information regarding the current trading prices for the Outstanding Notes is
not available.     
 
                                      107
<PAGE>
 
                        DESCRIPTION OF NEW SENIOR NOTES
 
GENERAL
   
  The New Senior Notes will be secured obligations governed by the New Senior
Note Indenture, between the Company and Wilmington Trust Company, as trustee
(the "New Indenture Trustee"), dated as of the Effective Date. The Company's
obligations under the New Senior Note Indenture will be secured as provided in
the New Collateral Documents (as hereinafter defined). See "Collateral and
Security" below. The following summary of certain provisions of the New Senior
Notes and the New Senior Note Indenture does not purport to be complete and is
subject to and is qualified in its entirety by reference to all of the
provisions of the New Senior Note Indenture and the New Collateral Documents,
including the definitions therein of certain terms. Capitalized terms used in
the following summary and not otherwise defined herein shall have the meanings
ascribed to them in the New Senior Note Indenture, the New Collateral Documents
or the Prepackaged Plan, as applicable.     
   
  The New Senior Notes will be limited to $110,000,000 aggregate principal
amount and will mature on the anniversary of the Effective Date in 2002.
Interest on the New Senior Notes will accrue at 11-1/8% per annum and will be
payable semiannually in arrears on each June 30 and December 31, commencing
after the Effective Date of the Prepackaged Plan, to holders of record of the
New Senior Notes at the close of business on the immediately preceding June 1
and December 1, whether or not a Business Day. Interest will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Interest will
accrue from the most recent date to which interest has been paid for, or, if no
interest has been paid, from the Effective Date. The Company will pay interest
on overdue principal at the rate equal to 2% per annum in excess of the
interest rate on the New Senior Notes to the extent lawful; and it will pay
interest on overdue installments of interest (without regard to any applicable
grace periods) at the same rate to the extent lawful. Regularly scheduled
payments of principal and interest, are payable to holders of New Senior Notes
at the office or agency of the Company in Philadelphia, Pennsylvania, or at the
option of a holder of New Senior Notes, payment of interest may be made by
check mailed to such holder at its address set forth in the register of holders
or by wire to an account designated by such holder. Unless otherwise designated
by the Company, the Company's office or agency in Philadelphia, Pennsylvania
will be the office of the New Indenture Trustee maintained for such purpose.
The New Senior Notes will be issued in registered form, without coupons, and
only in denominations of $1,000 and integral multiples thereof.     
 
OPTIONAL REDEMPTION
 
  The Company will have the option to redeem the New Senior Notes, in whole or
in part, upon not less than 30 nor more than 60 days' notice, at a redemption
price equal to 100% of the principal amount plus accrued and unpaid interest,
if any, thereon to the applicable redemption date.
 
MANDATORY REDEMPTION
 
  Except as set forth below with respect to Asset Sale Proceeds and Change of
Control, the Company will not be required to make mandatory redemption payments
or sinking fund payments with respect to the New Senior Notes.
 
NOTICE AND SELECTION
 
  If the Company elects to redeem New Senior Notes pursuant to the optional
redemption provisions described above, it shall furnish to the New Indenture
Trustee, at least 45 days but not more than 75 days before a redemption date,
written notice setting forth (i) the redemption date, (ii) the principal amount
of New Senior Notes to be redeemed and (iii) the redemption price. If less than
all of the New Senior Notes are to be redeemed, the New Indenture Trustee shall
select the New Senior Notes to be redeemed among the holders of New Senior
Notes in compliance with the requirements of the principal national securities
exchange, if any, on which the New Senior Notes are listed, or, if the New
Senior Notes are not so listed, on
 
                                      108
<PAGE>
 
a pro rata basis, by lot or in accordance with any other method the New
Indenture Trustee considers fair and appropriate (and in such manner as
complies with applicable legal and stock exchange requirements, if any),
provided that no New Senior Notes of $1,000 or less shall be redeemed in part.
In the event of partial redemption by lot, the particular New Senior Notes to
be redeemed shall be selected, unless otherwise provided in the New Senior Note
Indenture, not less than 30 nor more than 60 days prior to the redemption date
by the New Indenture Trustee from the outstanding New Senior Notes not
previously called for redemption.
 
  The New Indenture Trustee will promptly notify the Company in writing of the
New Senior Notes selected for redemption and, in the case of any New Senior
Note selected for partial redemption, the principal amount thereof to be
redeemed. New Senior Notes and portions of them selected shall be in amounts of
$1,000 or whole multiples of $1,000; except that if all of the New Senior Notes
of a holder are to be redeemed, the entire outstanding amount of New Senior
Notes held by such holder, even if not a multiple of $1,000, will be redeemed.
Except as provided in the preceding sentence, provisions of the New Senior Note
Indenture that apply to New Senior Notes called for redemption also apply to
portions of New Senior Notes called for redemption.
 
GUARANTEE
   
  The due, punctual and full payment of the principal of and interest on the
New Senior Notes will be jointly, severally and unconditionally guaranteed by
the Subsidiaries of the Company. Each of the Guarantors will execute the New
Senior Note Indenture and the guarantee to be endorsed on each New Senior Note.
       
  The Company currently has five Subsidiaries: MRT West, Inc., MRT Creekside,
Inc., MRT Newark, Inc., MRT Santa Monica, Inc., and 150 Rittenhouse Circle,
Inc. Each of the Subsidiaries is a single-asset entity created solely for the
purpose of holding title to a specific property while insulating the Company
from liabilities associated with the ownership of or investment in such
property. As of March 31, 1995, the aggregate net book value of the
Subsidiaries represented 2.6% of the aggregate net book value of the Company on
a consolidated basis.     
 
ASSET SALE PROCEEDS
   
  If at any time the aggregate amount of Asset Sale Proceeds and the net cash
proceeds of Indebtedness incurred pursuant to the New Senior Note Indenture
that have not been applied in accordance with this provision (exclusive of any
Asset Sale Proceeds or net cash proceeds which remain after the completion of
any prior Asset Sale Offer) exceeds $10 million, the Company will make an offer
to all holders of New Senior Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of New Senior Notes that, together with accrued and
unpaid interest thereon, may be purchased with 80% of any such Asset Sale
Proceeds or 100% of the net cash proceeds of such Indebtedness, at an offer
price in cash in an amount equal to 100% of the outstanding principal amount
thereof plus accrued and unpaid interest, if any, to the date fixed for the
closing of such offer, in accordance with the procedures specified in the New
Senior Note Indenture and summarized in the remainder of this section "Asset
Sale Proceeds."     
 
  The Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Offer Period"). No later than five
Business Days after the termination of the Offer Period (the "Purchase Date"),
the Company will purchase the maximum principal amount of New Senior Notes that
may be purchased with 80% of such Asset Sale Proceeds or 100% of the net cash
proceeds of such Indebtedness (the "Offer Amount"), or, if less than the Offer
Amount has been tendered, all New Senior Notes tendered in response to the
Asset Sale Offer.
 
  If the Purchase Date is on or after an interest record date and on or before
the related interest payment date, any accrued interest will be paid to the
person in whose name a New Senior Note is registered at the
 
                                      109
<PAGE>
 
close of business on such record date, and no additional interest will be
payable to holders who tender New Senior Notes pursuant to the Asset Sale
Offer.
 
  Upon the commencement of any Asset Sale Offer the Company will send, by first
class mail, a notice to the New Indenture Trustee and each of the holders of
the New Senior Notes, with a copy to the New Indenture Trustee. The notice will
contain all instructions and materials necessary to enable such holders to
tender New Senior Notes pursuant to the Asset Sale Offer. The notice, which
will govern the terms of the Asset Sale Offer will state: (1) that such Asset
Sale Offer is being made pursuant to this provision and that the length of time
such Asset Sale Offer will remain open; (2) the Offer Amount, the purchase
price and the Purchase Date; (3) that any New Senior Note not tendered or
accepted for payment will continue to accrue interest in accordance with its
terms; (4) that any New Senior Note accepted for payment pursuant to such Asset
Sale Offer will cease to accrue interest after the Purchase Date; (5) that
holders electing to have a New Senior Note purchased pursuant to such Asset
Sale Offer will be required to surrender the New Senior Note at least three
Business Days before the Purchase Date with the form entitled "Option of Holder
to Elect Purchase" on the reverse of the New Senior Note completed, to the
Company, a depositary, if appointed by the Company, or a paying agent at the
address specified in the notice; (6) that holders of New Senior Notes will be
entitled to withdraw their election if the Company, depositary or paying agent,
as the case may be, receives, not later than the expiration of the Offer
Period, a telegram, telex, facsimile transmission or letter setting forth the
name of the holder of New Senior Notes, the principal amount of the New Senior
Note the holder delivered for purchase and a statement that such holder is
withdrawing his or her election to have the New Senior Note purchased; (7)
that, if the aggregate principal amount of New Senior Notes surrendered by
holders thereof exceeds the Offer Amount, the Company will select the New
Senior Notes to be purchased on a pro rata basis (with such adjustments as may
be deemed appropriate by the Company so that only New Senior Notes in
denominations of $1,000, or integral multiples thereof, will be purchased); and
(8) that holders whose New Senior Notes were purchased only in part will be
issued new New Senior Notes equal in principal amount to the unpurchased
portion of the New Senior Notes surrendered.
 
  Any holder of New Senior Notes may at any time elect to deliver to the New
Indenture Trustee written instructions (each a "Standing Instruction") stating
that such holder desires to participate in any Asset Sale Offer by tendering
the maximum permitted number of such holder's New Senior Notes for repurchase
in such Asset Sale Offer. Upon receipt of such Standing Instruction, the New
Indenture Trustee will deem the maximum permitted number of such holder's New
Senior Notes tendered upon the commencement of any Asset Sale Offer. The
issuing holder of New Senior Notes may withdraw such Standing Instruction at
any time prior to the expiration of an Offer Period by so notifying the New
Indenture Trustee in writing. Each holder of New Senior Notes electing not to
deliver a Standing Instruction must respond to the notice of any Asset Sale
Offer, as set forth above, prior to the termination of the Offer Period if such
holder wishes to participate in an Asset Sale Offer.
   
  On or before the Purchase Date, the Company will, to the extent lawful,
accept for payment, on a pro rata basis to the extent necessary, the Offer
Amount of New Senior Notes or portions thereof tendered pursuant to the Asset
Sale Offer, or, if less than the Offer Amount has been tendered, all New Senior
Notes, and deliver to the New Indenture Trustee an Officers' Certificate
stating that such New Senior Notes or portions thereof were accepted for
payment by the Company in accordance with the terms of this provision. The
Company, depositary or paying agent, as the case may be, shall promptly (but in
any case not later than five days after the Purchase Date) mail or deliver (or
wire, if requested by a holder of New Senior Notes in advance) to each
tendering holder of New Senior Notes an amount equal to the purchase price of
the New Senior Note tendered by such holder and accepted by the Company for
purchase, and the Company will promptly issue a new New Senior Note, and the
New Indenture Trustee will authenticate and mail or deliver such new New Senior
Note to such holder equal in principal amount to any unpurchased portion of the
New Senior Note surrendered. Any New Senior Note not so accepted shall be
promptly mailed or delivered by the Company to the holder thereof. The Company
will publicly announce the results of the Asset Sale Offer on the Purchase
Date. In the event that the aggregate amount of Asset Sale Proceeds or net cash
proceeds of     
 
                                      110
<PAGE>
 
Indebtedness incurred pursuant to the New Senior Note Indenture exceeds the
aggregate principal amount of New Senior Notes surrendered by holders thereof
pursuant to such Asset Sale Offer, the Company may use the remaining Asset Sale
Proceeds or net cash proceeds of such Indebtedness in accordance with the terms
of the New Senior Note Indenture. If the aggregate principal amount of New
Senior Notes surrendered by holders thereof exceeds the amount of Asset Sale
Proceeds or net cash proceeds of Indebtedness incurred pursuant to the New
Senior Note Indenture, the New Indenture Trustee will select the New Senior
Notes to be purchased on a pro rata basis. Upon completion of any Asset Sale
Offer, the amount of Asset Sale Proceeds or net cash proceeds of such
Indebtedness will be deemed to be reset at zero.
 
  Other than as specifically provided in this provision, any purchase pursuant
to this provision will be made pursuant to the provisions of the New Senior
Note Indenture relating to redemptions in general.
   
  Whenever any Asset Sale Proceeds or net cash proceeds of Indebtedness
incurred pursuant to the New Senior Note Indenture are received by the Company,
such Asset Sale Proceeds or net cash proceeds of Indebtedness will be set aside
in the Asset Sale Account pending allocation of such Asset Sale Proceeds or net
cash proceeds of Indebtedness incurred pursuant to the provisions of the New
Senior Note Indenture.     
   
  All cash Asset Sale Proceeds shall be deposited in the Asset Sales Account
immediately upon receipt by the Company or any Subsidiary or their agent. All
non-cash Asset Sale Proceeds shall be delivered immediately to the New
Collateral Agent upon receipt by the Company or any Subsidiary or their agent
and shall be pledged to the New Collateral Agent for the ratable benefit of the
holders of New Senior Notes to secure the obligations of the Company under the
New Senior Note Indenture and the New Senior Notes pursuant to a pledge
agreement in form and substance satisfactory to the New Indenture Trustee. When
the aggregate amount of Asset Sale Proceeds and net cash proceeds from
Indebtedness incurred pursuant to the New Senior Note Indenture exceeds $10
million, the Company will be required to apply all such Asset Sale Proceeds and
net cash proceeds to an Asset Sale Offer in accordance with the procedures set
forth above in this section "Asset Sale Proceeds." The cash Asset Sale Proceeds
shall be distributed to the holders of New Senior Notes also in accordance with
the procedures set forth above. Any cash Asset Sale Proceeds not so distributed
to holders of New Senior Notes will be returned to the Company.     
 
CHANGE OF CONTROL
 
  Unless waived by the Required Holders, upon the occurrence of a Change of
Control, the Company will make an offer (the "Change of Control Offer") to each
holder of New Senior Notes to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such holder's New Senior Notes at a purchase
price equal to 100% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (the "Change of Control
Payment"). Within 45 days following any Change of Control, the Company will
mail a notice to the New Indenture Trustee and each holder of New Senior Notes
stating: (1) that the Change of Control Offer is being made pursuant to this
provision and that all New Senior Notes tendered will be accepted for payment;
(2) the purchase price and the purchase date, which shall be no earlier than 30
days nor later than 45 days from the date such notice is mailed (the "Change of
Control Payment Date"); (3) that any New Senior Note not tendered shall
continue to accrue interest in accordance with its terms; (4) that, unless the
Company defaults in the payment of the Change of Control Payment, all New
Senior Notes accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest after the Change of Control Payment Date; (5) that
holders of New Senior Notes electing to have any New Senior Notes purchased
pursuant to a Change of Control Offer will be required to surrender the New
Senior Notes, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of the New Senior Notes completed, to the paying agent at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) that holders of
New Senior Notes will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder of New Senior
Notes, the principal amount of New
 
                                      111
<PAGE>
 
Senior Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such New Senior Notes purchased; and (7) that
holders of New Senior Notes whose New Senior Notes are being purchased only in
part will be issued new New Senior Notes equal in principal amount to the
unpurchased portion of the New Senior Notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount or an integral multiple
thereof. The Company will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable to the
repurchase of the New Senior Notes in connection with a Change of Control.
 
  On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment New Senior Notes or portions thereof tendered
pursuant to the Change of Control Offer, (2) deposit with the paying agent an
amount equal to the Change of Control Payment in respect of all New Senior
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the New Indenture Trustee the New Senior Notes so accepted together, with an
Officers' Certificate stating the New Senior Notes or portions thereof tendered
to the Company. The paying agent shall promptly mail to each holder of New
Senior Notes such accepted payment in an amount equal to the purchase price for
such New Senior Notes, and the New Indenture Trustee shall promptly
authenticate and mail to each holder a new New Senior Note equal in principal
amount to any unpurchased portion of the New Senior Notes surrendered, if any;
provided, however, that each such new New Senior Note shall be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
 
  The New Indenture Trustee shall be under no obligation to ascertain the
occurrence of a Change in Control or to give notice with respect thereto other
than upon receipt of the written notice of Change in Control from the Company.
The New Indenture Trustee may conclusively assume, in the absence of a written
notice to the contrary from the Company or any holder of New Senior Notes, that
no Change in Control has occurred. Except as described above with respect to a
Change of Control, the Company will not be required to repurchase or redeem the
New Senior Notes from the holders of the New Senior Notes in the event of a
takeover, recapitalization or similar transaction.
 
CERTAIN COVENANTS OF THE COMPANY
 
  The following is a summary of certain of the covenants contained in the New
Senior Note Indenture:
   
  Limitation on Investments. The Company will not be permitted to, nor will it
be permitted to allow any Subsidiary to, directly or indirectly, make any
Investment from and after the Effective Date except: (1) Investments which
constitute leasing commissions and tenant improvements, related to the
ownership and maintenance of a parcel or parcels of Real Estate in an amount
not to exceed by more than 10% the amount of such commissions or improvements
set forth in a budget approved by the Board of Trustees of the Company (as the
same may be amended from time to time with the consent of the Board of Trustees
of the Company); (2) with any Asset Sale Proceeds that are not applied to the
then outstanding New Senior Notes in accordance with the "Asset Sale Proceeds"
provision above, new loans to non-Affiliates or new equity Investments, in each
case approved by the Board of Trustees of the Company; (3) Investments approved
by the Board of Trustees of the Company of Available Cash in Cash Equivalents;
(4) Investments approved by the Board of Trustees of the Company created by the
Company or any Subsidiary as a result of any sale, refinancing or disposition
of assets when the Company or such Subsidiary accepts, in partial payment of an
outstanding obligation, a new mortgage or equity interest in the same property;
and (5) Investments approved by the Board of Trustees of the Company in
Subsidiaries formed or maintained pursuant to the New Senior Note Indenture;
provided, however, that the stock of any such new Subsidiary is pledged to the
New Collateral Agent for the ratable benefit of the holders of New Senior Notes
in accordance with the New Senior Note Indenture.     
 
  Indebtedness. The Company will not be permitted to, directly or indirectly,
and will not directly or indirectly, permit any Subsidiary to incur, create,
assume or suffer to exist any Indebtedness except:
 
                                      112
<PAGE>
 
   
(1) Indebtedness represented by the New Senior Notes; (2) Contingent
Obligations constituting endorsements for collection or deposit in the
ordinary course of business; (3) current liabilities in respect of taxes,
assessments and governmental charges or levies incurred, or claims for labor,
materials, inventory, services, supplies and rentals incurred, or for goods or
services purchased, in the ordinary course of business consistent with the
past practice of the Company or such Subsidiary; (4) Indebtedness arising
under any performance bond reimbursement obligation entered into in the
ordinary course of business of the Company or such Subsidiary consistent with
the past practice of the Company or such Subsidiary; (5) unimpaired
indemnification claims under the Amended and Restated Declaration of Trust of
the Company; (6) Indebtedness arising in connection with Subsidiaries formed
or maintained pursuant to the New Senior Note Indenture; (7) the First Lien
Debt; (8) Indebtedness incurred to finance the purchase price of property;
provided, however, that such Indebtedness shall be non-recourse to the Company
or such Subsidiary; and (9) additional secured Indebtedness of the Company;
provided, however, that (i) 100% of the net cash proceeds of such
Indebtedness, after deducting all expenses related thereto, shall be applied
to the repayment of the New Senior Notes in accordance with the "Asset Sale
Proceeds" provision above, and (ii) the interest rate payable in respect of
such Indebtedness shall be lower than the interest rate then payable in
respect of the New Senior Notes; and, provided, further, that if such interest
rate is not a fixed rate of interest, the Company shall have entered into an
interest rate agreement or other contractual arrangement concurrently with the
incurrence of such Indebtedness the economic effect of which shall be that
such floating interest rate over the life of such Indebtedness shall be lower
than the interest rate then payable in respect of the Notes.     
   
  Restricted Payments. The Company will not be permitted to (1) declare or
make any dividend payment or other distribution of assets, properties, cash,
rights, obligations or securities on account of or in respect of any of its
Common Shares or any Preferred Stock which may be issued by the Company, other
than such declaration and making of dividend payments that the Company deems
necessary to preserve its status as a REIT, unless the Consolidated Net Worth
of the Company at the time of such payment and after giving effect thereto is
at least $50 million; provided, however, that the Company shall in no event
declare or make any such dividend payment or other distribution if a Default
or Event of Default has occurred and is continuing under the New Senior Note
Indenture, or (2) purchase, redeem or otherwise acquire for value its Common
Shares or any Preferred Stock which may be issued by the Company, whether
outstanding on the Effective Date or thereafter issued and outstanding, unless
the Consolidated Net Worth of the Company at the time of such purchase,
redemption or other acquisition and after giving effect thereto is at least
$50 million; provided, however, that the Company shall in no event make any
such purchase, redemption or other acquisition if a Default or Event of
Default has occurred and is continuing.     
 
  Transactions with Affiliate. The Company will not be permitted to, nor will
it be permitted to allow any Subsidiary to: (1) make any Investment in an
Affiliate; (2) transfer, sell, lease, assign or otherwise dispose of any
assets to any such Affiliate; (3) merge into or consolidate with or purchase
or acquire assets from any Affiliate; (4) repay any Indebtedness to any
Affiliate (except under existing retirement or deferred compensation plans);
or (5) enter into any other transaction directly or indirectly with or for the
benefit of any such Affiliate (including, without limitation, guaranties and
assumptions of obligations of any such Affiliate) except for (i) transactions
in the ordinary course of business on a basis no less favorable to the Company
or such Subsidiary as would be obtained in a comparable arm's length
transaction with a person which is not an Affiliate, (ii) compensation to
trustees commensurate with current compensation levels, (iii) salaries and
other employee compensation and benefits to officers of the Company or such
Subsidiary commensurate with the compensation levels in effect as of the date
of the New Senior Note Indenture as may reasonably be adjusted over time but
in no event to exceed 10% annually in the aggregate, (iv) any transaction
required or otherwise permitted by the Prepackaged Plan or the New Senior Note
Indenture, and (v) transactions with respect to Subsidiaries pursuant to the
New Senior Note Indenture.
 
COLLATERAL AND SECURITY
 
  The New Senior Notes will be secured by a first priority Lien in and on all
of the Collateral, in favor of the New Collateral Agent for the benefit of the
New Indenture Trustee, the New Collateral Agent and the
 
                                      113
<PAGE>
 
holders of New Senior Notes, (i) superior to and prior to the rights of all
third persons other than those holding the First Lien Debt, and (ii) subject to
no Liens other than the Liens permitted under the New Senior Note Indenture.
The Collateral will consist of all of the Company's assets, including, without
limitation, all personal property and real property, tangible or intangible,
and all rents, issues, profits and proceeds thereof held by the Company or any
Subsidiary. The security interests will be granted by the Company and the
Subsidiaries pursuant to the New Collateral Documents.
          
  Release of Collateral. Subject to the certain conditions set forth in the
Senior Note Indenture, Collateral which is sold, conveyed or disposed of in
compliance with the provisions of the New Senior Note Indenture may be released
(from the Lien and security interest created by the New Collateral Documents)
from time to time in accordance with the provisions of the New Collateral
Documents.     
 
  No Collateral will be released from the Lien and security interest created by
the New Collateral Documents unless the Company has made an Asset Sale Offer in
accordance with the New Senior Note Indenture. Notwithstanding any of the terms
of the New Senior Note Indenture or of any of the New Collateral Documents, at
any time when an Event of Default will have occurred and be continuing and the
maturity of the New Senior Notes shall have been accelerated (whether by
declaration or otherwise), the New Collateral Agent will not, without the
consent of the Required Holders, release any Collateral pursuant to the
provisions of the New Senior Note Indenture or any of the New Collateral
Documents.
 
AMENDMENT, SUPPLEMENT AND WAIVER
 
  The Company and the Trustee, as applicable, may amend or supplement the New
Senior Note Indenture, the New Senior Notes or any amended or supplemental New
Senior Note Indenture with the written consent of the Required Holders
(including consents obtained in connection with a tender offer or exchange
offer for the New Senior Notes) and any existing Default or Event of Default
and its consequences or compliance with any provision of the New Senior Note
Indenture or the New Senior Notes may be waived with the consent of the
Required Holders (including consents obtained in connection with a tender offer
or exchange offer for the New Senior Notes); provided that, without the consent
of each holder of a New Senior Note affected, an amendment or waiver may not
(with respect to any New Senior Notes held by a nonconsenting holder of New
Senior Notes) reduce the principal amount of New Senior Notes whose holders
must consent to an amendment, supplement or waiver, reduce the principal of or
change the fixed maturity of any New Senior Note or reduce the redemption price
of the New Senior Notes, reduce the rate of or change the time for payment of
interest on any New Senior Note, waive a Default or Event of Default in the
payment of principal of or interest on the New Senior Notes (except a
rescission of acceleration of the New Senior Notes by the Required Holders and
a waiver of the payment default that resulted from such acceleration), make any
New Senior Note payable in money other than that stated in the New Senior
Notes, make any change in the provisions of the New Senior Note Indenture
relating to waivers of past Defaults or the rights of holders of New Senior
Notes to receive payments of principal of or interest on the New Senior Notes,
directly or indirectly release Liens on all or substantially all of the
Collateral except in connection with a merger, consolidation or disposition of
assets permitted under the New Senior Note Indenture, make any change in the
foregoing amendment and waiver provision, or waive a redemption payment with
respect to any New Senior Note. Without the consent of any holder of New Senior
Notes, the Company and the New Indenture Trustee, as applicable, may amend or
supplement the New Senior Note Indenture and the New Senior Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated New Senior
Notes in addition to or in place of certificated New Senior Notes, to provide
for (i) the assumption of the Company's obligations to the holders of the New
Senior Notes in the case of a merger or consolidation pursuant to the New
Senior Note Indenture and (ii) certain amendments to the New Collateral
Documents expressly called for therein pursuant to the New Senior Note
Indenture, to execute and deliver any documents necessary or appropriate to
release Liens on any Collateral as permitted by the New Senior Note Indenture,
to make any change that would provide any additional rights or benefits to the
holders of the New Senior Notes or that does not materially adversely affect
the legal rights under the New Senior Note Indenture of any holder of the New
 
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Senior Notes, or to comply with requirements of the Commission in order to
effect or maintain the qualification of the New Senior Note Indenture under the
TIA.
 
EVENTS OF DEFAULT
   
  The following events will constitute "Events of Default" under the New Senior
Note Indenture: (a) the Company fails to make any payment in respect of
principal of the New Senior Notes or under the "Asset Sale Proceeds" or "Change
in Control" provisions of the New Senior Note Indenture described in the
appropriately captioned paragraphs above when the same becomes due and payable
and such failure continues for a period of 5 business days after the due date
of such payment, or the Company fails to make any payment when due of interest
on the New Senior Notes and such failure continues for a period of 10 days
after the due date of such payment; (b) any representation or warranty made or
deemed made by the Company or any Subsidiary (or any of their officers) under
this Disclosure Statement or the New Collateral Documents which proves to have
been untrue or incorrect in any material respect when made or deemed made; (c)
the Company (or the Company or any Subsidiary in the case of New Collateral
Documents) fails to perform any term, covenant or agreement of the Company
(subject in certain cases to a 30-day cure period); (d) the Company or any
Subsidiary fails, after any applicable grace period, to pay any principal of or
premium, if any, or interest on any of its Indebtedness in an amount exceeding
$1,000,000 (excluding the New Senior Notes), when the same becomes due and
payable (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), or any other event occurs or condition exists under any
agreement or instrument relating to any such Indebtedness, if the effect of
such event or condition is to accelerate, or to permit the acceleration of, the
maturity of such Indebtedness; or any such Indebtedness shall be declared to be
due and payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof; (e) bankruptcy,
insolvency, reorganization or other similar events with respect to the Company
or any Material Subsidiary; (f) any judgment or order for the payment of money
in excess of $1,000,000 is rendered against the Company or any Subsidiary, and
either enforcement proceedings has been commenced by any creditor upon such
judgment or order, or there shall be any period of 10 consecutive days during
which a stay of enforcement of such judgment or order by reason of a pending
appeal or otherwise, is not in effect; and (g) except for releases of
Collateral pursuant to Asset Sales effected in accordance with the New Senior
Note Indenture, the New Senior Note Indenture or the New Collateral Documents,
for any reason, cease to create a valid Lien on Collateral having a value of
$1,000,000 or more purported to be covered thereby, or such Lien ceases to have
the priority Lien status initially granted and be a perfected Lien as to
collateral having a value of $1,000,000 or more.     
 
  If an Event of Default occurs and is continuing, the New Indenture Trustee by
notice to the Company may, or upon written notice from the Required Holders
will, or the Required Holders by written notice to the Company and the New
Indenture Trustee may, declare all the New Senior Notes to be due and payable
immediately. Upon such declaration, the principal of, premium, if any, and
interest on the New Senior Notes shall be due and payable immediately. If an
Event of Default arising from bankruptcy, insolvency, reorganization or similar
events occurs with respect to the Company or any Material Subsidiary, such an
amount will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the New Indenture Trustee or any holder
of New Senior Notes. The Required Holders by written notice to the New
Indenture Trustee may on behalf of all of the holders of New Senior Notes
rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default
(except nonpayment of principal, interest or premium that has become due solely
because of the acceleration) have been cured or waived. If an Event of Default
occurs and is continuing, the New Indenture Trustee and/or the New Collateral
Agent, as applicable, may pursue any available remedy (under the New Senior
Note Indenture, the New Collateral Documents or otherwise) to collect the
payment of principal and interest on the New Senior Notes or to enforce the
performance of any provision of the New Senior Notes, the New Senior Note
Indenture or the New Collateral Documents.
   
  A holder of a New Senior Note may pursue a remedy with respect to the New
Senior Note Indenture or such New Senior Note only if: (i) the holder of a New
Senior Note gives to the New Indenture Trustee and     
 
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<PAGE>
 
   
the New Collateral Agent written notice of a continuing Event of Default, (ii)
the Required Holders make a written request to the New Indenture Trustee and
the New Collateral Agent to pursue the remedy, (iii) such holder of a New
Senior Note or holders of New Senior Notes offer and, if requested, provide to
the New Indenture Trustee and the New Collateral Agent indemnity satisfactory
to the New Indenture Trustee and the New Collateral Agent against any loss,
liability or expense, (iv) the New Indenture Trustee and the New Collateral
Agent do not comply with the request within 60 days after receipt of the
request and the offer and, if requested, the provision of indemnity, and (v)
during such 60-day period the Required Holders do not give the New Indenture
Trustee and the New Collateral Agent a direction inconsistent with the request.
Notwithstanding any other provision of the Senior Note Indenture, the right of
any holder of a New Senior Note to receive payment of principal and interest on
such New Senior Note, on or after the respective due dates expressed in such
New Senior Note, or to bring suit for the enforcement of any such payment on or
after such respective dates, will not be impaired or affected without the
consent of the holder of New Senior Notes, except that no holder of New Senior
Notes will have the right to institute any such suit if and to the extent that
the institution or prosecution thereof or the entry of judgment therein would
under applicable law result in the surrender, impairment, waiver or loss of the
Liens pursuant to the New Collateral Documents upon any property subject to
such Liens.     
 
  The Required Holders may direct the time, method and place of conducting any
proceeding for any exercising remedy available to the New Indenture Trustee
and/or the New Collateral Agent or exercising any trust or power conferred on
it or them. However, the New Indenture Trustee and/or the New Collateral Agent
may refuse to follow any such direction that conflicts with the law, the New
Senior Note Indenture or the New Collateral Documents, that the New Indenture
Trustee and/or the New Collateral Agent determines may be unduly prejudicial to
the rights of other holders of New Senior Notes or that may involve the New
Indenture Trustee and/or the New Collateral Agent in personal liability. Before
proceeding to exercise any rights or powers under the New Senior Indenture or
the New Collateral Documents at the request or direction of any of the holders
of New Senior Notes, the New Indenture Trustee and the New Collateral Agent
will be entitled to receive from the holders of New Senior Notes reasonable
security or indemnity against the costs, expenses and liabilities that might be
incurred by it in compliance with any such direction.
 
SUCCESSOR COMPANY
 
  The Company may not consolidate or merge with or into (whether or not the
Company is the surviving entity), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions to, another person unless (i) the Company is
the surviving entity, or the person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia, (ii) the person formed
by or surviving any such consolidation or merger (if other than the Company),
or the person to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made, assumes, pursuant to a supplemental
indenture and appropriate collateral documents in forms reasonably satisfactory
to the New Indenture Trustee, all of the obligations of the Company under the
New Senior Notes and the New Senior Note Indenture and all the obligations of
the Company under the New Collateral Documents, (iii) immediately before and
immediately after giving effect to such transaction no Default or Event of
Default exists, and (iv) the Company or the person formed by or surviving any
such consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made after giving pro
forma effect thereto as of the end of the most recently completed fiscal
quarter, shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction.
 
DEFEASANCE
 
  The Company may, at the option of its Board of Trustees evidenced by a
resolution set forth in an Officers' Certificate, at any time, with respect to
the New Senior Notes, elect to have the defeasance section
 
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<PAGE>
 
of the New Senior Note Indenture be applied to all outstanding New Senior Notes
upon compliance with the conditions set forth in the defeasance article of the
New Senior Note Indenture. Upon the Company's exercise of this option the
Company will be deemed to have been discharged from its obligations with
respect to all outstanding New Senior Notes on the date the conditions set
forth in the New Senior Note Indenture are satisfied (hereinafter
"Defeasance"). For this purpose, such Defeasance means that the Company will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding New Senior Notes, which shall thereafter be deemed to be
"outstanding" only for the purposes of the sections of the New Senior Note
Indenture so specified to in the defeasance article of the New Senior Note
Indenture, and to have satisfied all its other obligations under such New
Senior Notes and the New Senior Note Indenture (and the trustee, on demand of
and at the expense of the Company, will execute proper instruments
acknowledging the same), except for the following which will survive until
otherwise terminated or discharged hereunder: (a) the rights of holders of
outstanding New Senior Notes to receive solely from the trust fund described in
the New Senior Note Indenture, as more fully set forth in such defeasance
article, payments in respect of the principal of and interest on such New
Senior Notes when such payments are due, (b) the Company's obligations with
respect to such New Senior Notes under certain sections of the New Senior Note
Indenture, (c) the rights, powers, trusts, duties and immunities of the trustee
described in the New Senior Note Indenture and the Company's obligations in
connection therewith, and (d) the defeasance article of the New Senior Note
Indenture.
 
  The following will be the conditions to the application of Defeasance: (a)
the Company will irrevocably have deposited or caused to be deposited with the
New Indenture Trustee (or another New Indenture Trustee satisfying the
requirements of the New Senior Note Indenture who will agree to comply with the
provisions of the defeasance article of the New Senior Note Indenture
applicable to it) as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of such New Senior Notes, (i) cash in an amount
or (ii) non-callable Governmental Securities which through the scheduled
payment of principal and interest in respect thereof in accordance with their
terms will provide, not later than one day before the due date of any payment
under the New Senior Notes, cash in an amount, or (iii) a combination thereof,
in such amounts, as will be sufficient to pay and discharge and which will be
applied by the New Indenture Trustee (or other qualifying New Indenture
Trustee) to pay and discharge (A) the principal of and interest on the
outstanding New Senior Notes on the stated maturity or on the applicable
redemption date, as the case may be, of such principal or interest to maturity
and (B) any mandatory sinking fund payments or analogous payments applicable to
the outstanding New Senior Notes on the day on which such payments are due and
payable in accordance with the terms of the New Senior Note Indenture and of
such New Senior Notes; provided that the New Indenture Trustee will have been
irrevocably instructed to apply such money or the proceeds of such non-callable
Governmental Securities to said payments with respect to the New Senior Notes;
(b) no Default or Event of Default with respect to the New Senior Notes will
have occurred and be continuing on the date of such deposit; (c) such
Defeasance will not result in a breach or violation of, or constitute a default
under, the New Senior Note Indenture or any other agreement or instrument to
which the Company is a party or by which the Company is bound; (d) the Company
will have delivered to the New Indenture Trustee an Officers' Certificate
stating that the deposit made by the Company pursuant to its election under the
New Senior Note Indenture was not made by the Company with the intent of
preferring the holders over other creditors of the Company or with the intent
of defeating, hindering, delaying or defrauding creditors of the Company or
others; (e) the Company will have delivered to the New Indenture Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Defeasance under the New
Senior Note Indenture have been complied with; (f) the Company will have
delivered to the New Indenture Trustee an opinion of counsel reasonably
acceptable to the New Indenture Trustee confirming that (i) the Company has
received from or there has been published by, the Internal Revenue Service a
ruling or (ii) since the date hereof, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel will confirm that, the holders of the outstanding New
Senior Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
 
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<PAGE>
 
would have been the case if such Defeasance had not occurred; and (g) the
Company will have delivered to the New Indenture Trustee an opinion of counsel
to the effect that such deposit would not constitute a preference as defined in
Section 547 of the Bankruptcy Code, and the trust funds would not constitute
property included within the estate of the debtor.
 
THE NEW INDENTURE TRUSTEE AND NEW COLLATERAL AGENT
 
  The New Indenture Trustee will also be the corporate collateral agent under
the Security Agreement. The New Indenture Trustee may be removed as trustee
under the New Senior Note Indenture by the Required Holders and may be removed
as collateral agent under the Security Agreement by the Required Holders.
 
CERTAIN DEFINITIONS
   
  Set forth below are certain terms to be contained in the New Senior Note
Indenture, modified where appropriate to use terms as defined elsewhere in this
Disclosure Statement.     
 
  "Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person and includes each officer, director, trustee
or general partner of such person, and each owner of 5% or more of any class of
voting stock or interests of such person. For purposes of this definition,
"control" when used with respect to any specified person, means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
 
  "Asset Sale" means any sale or other disposition, or series of sales or other
dispositions, made on or after the Effective Date by the Company or any
Subsidiary to any person of any Collateral. For the purposes hereof, any
prepayment or payment at maturity of an Underlying Promissory Note shall be
deemed to be an "Asset Sale."
   
  "Asset Sale Account" means that trust account (account no. 28666) maintained
at Wilmington Trust Company in the name of the New Collateral Agent, under the
sole dominion and control of the New Collateral Agent, and administered
pursuant to the New Collateral Documents.     
 
  "Asset Sale Proceeds" means payments in cash or other property (including
securities) received by the Company or any Subsidiary (including, without
limitation, any cash payments received by way of deferred payment of principal
pursuant to a note or receivable or otherwise, but only as and when received)
from any Asset Sale (after repayment of any indebtedness required to be paid by
reason of such Asset Sale), in each case net of the amount of (a) reasonable
brokers' and advisors' fees and commissions actually paid other than to an
Affiliate of the Company, (b) all foreign, federal, state and local taxes
actually payable by the Company as a direct consequence of such Asset Sale, (c)
the reasonable fees and expenses attributable to such Asset Sale, to the extent
not included in clause (a) above, except to the extent paid to any Affiliate of
the Company, and (d) any proportionate share of the proceeds required to be
paid to any person owing a beneficial interest in the property or assets sold
pursuant to such Asset Sale.
 
  "Assignments of Leases" means each Assignment of Lease, made by the Company
or a Subsidiary, executed prior to the execution of the New Senior Notes
Indenture, concurrently with the execution of the New Senior Notes Indenture or
thereafter in favor of the New Collateral Agent on behalf of the New Indenture
Trustee, the New Collateral Agent and the holders of New Senior Notes,
assigning a Lease, as the same may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced in accordance with the
terms thereof.
 
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<PAGE>
 
  "Available Cash" means, as at any date of determination, all cash and Cash
Equivalents held by the Company, any Subsidiary or the New Indenture Trustee,
including, without limitation, cash and Cash Equivalents held in the Asset Sale
Account.
 
  "Business Day" means any day other than a Legal Holiday.
 
  "Capital Expenditures" means, for any person for any period, the aggregate of
all expenditures by such person and its consolidated Subsidiaries, except
interest capitalized during construction, during such period for property,
plant or equipment, including, without limitation, renewals, improvements,
replacements and capitalized repairs, that would be reflected as additions to
property, plant or equipment on a consolidated balance sheet of such person and
its Subsidiaries prepared in accordance with GAAP and includes, without
limitation, payments, other than those attributable to interest, on capitalized
leases and other indebtedness incurred to finance such property, plant and
equipment. For the purpose of this definition, the purchase price of equipment
which is acquired simultaneously with the trade-in of existing equipment owned
by such person or any of its Subsidiaries or with insurance proceeds, shall be
included in Capital Expenditures only to the extent of the gross amount of such
purchase price less the credit granted by the seller of such equipment being
traded in at such time or the amount of such proceeds, as the case may be.
 
  "Cash Equivalents" means, collectively, (i) securities with maturities of 90
days or less from the date of acquisition issued or fully guaranteed or insured
by the United States government or any agency thereof, (ii) certificates of
deposit, overnight bank deposits and banker acceptances of any commercial bank
(including Wilmington Trust Company) having combined capital and surplus of at
least $200,000,000, a short term deposit rating of A1/P1 or better and
organized under the laws of the United States of America having maturities of
90 days or less from the date of acquisition and (iii) commercial paper with
maturities of 90 days or less having a rating of A1/P1 or better.
   
  "Change of Control" means (i) the sale of all or substantially all of the
Company's and the Subsidiaries' assets (taken as a whole), in one or in a
series of transactions, to any "person" or "group" (as such terms are used in
or defined in Section 13(d)(3) of the Exchange Act), (ii) an event or series of
events (whether a stock purchase, merger, consolidation or other business
combination or otherwise) by which any person or group (other than the holders
of New Senior Notes existing on the date hereof, including any person becoming
a holder of New Senior Notes prior to the Effective Date and who is a holder of
New Senior Notes on the Effective Date) is or becomes the "Beneficial Owner"
(as defined under Rule 13d-3 under the Exchange Act), directly or indirectly,
of more than 50% of the combined voting power of the then outstanding
securities of the Company ordinarily (and apart from rights accruing after the
happening of a contingency) having the right to vote in the election of
trustees or (iii) after the date of first issuance of New Senior Notes, the
replacement of a majority of the Board of Trustees of the Company over a two-
year period from the trustees who constituted the Board of Trustees at the
beginning of such period other than by (a) trustees whose nomination for
election by the equityholders of the Company was approved by such Board of
Trustees, (b) trustees elected by such Board of Trustees or (c) trustees
nominated or elected by trustees approved as set forth in (a) or (b) above.
    
  "Collateral" means all the assets of the Company defined as "Collateral" in
the New Collateral Documents.
 
  "Collateral Assignment of Leases" means each Collateral Assignment of Lease
made by the Company or a Subsidiary, executed prior to the execution of the New
Senior Note Indenture, concurrently with the execution of the New Senior Note
Indenture or thereafter in favor of the New Collateral Agent on behalf of the
New Indenture Trustee, the New Collateral Agent and the holders of New Senior
Notes, assigning the related underlying assignment of lease, as the same may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced in accordance with the terms thereof.
 
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<PAGE>
 
  "Collateral Assignments of Mortgages" means each Collateral Assignment of
Mortgage or Collateral Assignment of Deed of Trust made by the Company or a
Subsidiary, executed prior to the execution of the New Senior Note Indenture,
concurrently with the execution of the New Senior Note Indenture or thereafter
in favor of the New Collateral Agent on behalf of the New Indenture Trustee,
the New Collateral Agent and the holders of New Senior Notes, assigning the
Underlying Mortgages, as the same may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced in accordance with the
terms thereof.
 
  "Consolidated Net Worth" means, with respect to any person, the sum of (i)
the consolidated equity of the common equityholders of such person and its
consolidated Subsidiaries plus (ii) the respective amounts reported on such
person's most recent balance sheet with respect to any series of preferred
equity that by its terms is not entitled to the payment of dividends unless
such dividends may be declared and paid only out of net earnings in respect of
the year of such declaration and payment, but only to the extent of any cash
received by such person upon issuance of such preferred equity, after
eliminating inter-company items, including appropriate deductions for any
minority interest in such person's Subsidiaries, less (x) all write-ups (other
than write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Issue Date in
the book value of any assets owned by such person or a consolidated Subsidiary
of such person and (y) all unamortized debt discount and expense and
unamortized deferred charges, all of the foregoing determined in accordance
with GAAP.
 
  "Contingent Obligation" means with reference to any person, any direct or
indirect liability, contingent or otherwise, of such person with respect to any
Indebtedness or contractual obligation of another person, if the purpose or
intent of such person in incurring the Contingent Obligation is to provide
assurance to the obligee of such Indebtedness or contractual obligation that
such Indebtedness or contractual obligation will be paid or discharged, or that
any agreement relating thereto will be complied with, or that any holder of
such Indebtedness or contractual obligation will be protected (in whole or in
part) against loss in respect thereof.
 
  "Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
 
  "First Lien Debt" means indebtedness of Paseo Padre Associates, a California
partnership, 100% owned by the Company and its subsidiaries under the Imperial
Bank Loan Agreement in an aggregate principal amount at any time outstanding
not to exceed $18.1 million (plus interest, fees, costs and expenses).
   
  "GAAP" means generally accepted accounting principles in the United States of
America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board, or in such other statements by such other
person as may be in general use by significant segments of the accounting
profession, which are applicable to the circumstances as of the date of
determination.     
 
  "Guarantor" means each of the Subsidiaries of the Company listed as
guarantors in the New Senior Note Indenture or any other guarantor of the
obligations under the New Senior Note Indenture.
 
  "Governmental Securities" means direct obligations of, or obligations
guaranteed by, the United States of America, to the payment of which the full
faith and credit of the United States is pledged.
 
  "Indebtedness" means with reference to any person (a) all indebtedness of
such person for borrowed money (including, without limitation, reimbursement
and all other obligations with respect to surety bonds, letter of credit and
bankers' acceptances, whether or not matured) or for the deferred purchase
price of property or services (other than normal trade accounts payable
incurred in the ordinary course of business), (b) all obligations of such
person evidenced by notes, bonds, debentures or similar instruments, (c) all
indebtedness of such person created or arising under any conditional sale or
other title retention agreement
 
                                      120
<PAGE>
 
with respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (d) all capitalized
lease obligations of such person, (e) all Contingent Obligations of such
person, (f) all obligations of such person under interest rate contracts, (g)
all indebtedness of the type referred to in clause (a), (b), (c), (d), (e) or
(f) above secured by (or for which the holder of such indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien against
property or an interest in property owned by such person, even though such
person has not assumed or become liable for the payment of such indebtedness,
and (h) in the case of the Company, the New Senior Notes.
 
  "Investment" means any advance, loan, extension of credit or capital
contribution to, or purchase of any stocks, bonds, notes, debentures or other
securities of, or interests in, any person, any purchase of any interest in
Real Estate (other than by foreclosure, deed in lieu of foreclosure or other
method of realizing on security) or any commitment or other obligation, whether
contingent or absolute, to do any of the foregoing, which commitment or other
obligation does not constitute a Contingent Obligation and any Capital
Expenditures.
 
  "Lease" means each underlying lease of Real Estate.
 
  "Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York, Los Angeles, California, Philadelphia,
Pennsylvania, Wilmington, Delaware or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
   
  "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment,
deposit arrangements, encumbrance, lien (statutory or other), security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever, including, without limitation, any
conditional sale or other title retention agreement, the interest of a lessor
under a capitalized lease obligation, any financing lease having substantially
the same economic effect as any of the foregoing, the filing, under the Uniform
Commercial Code or comparable law of any jurisdiction, of any financing
statement naming the owner of the assets to which such Lien relates as debtor,
and any agreement to grant a Lien.     
 
  "Material Subsidiary" means each Subsidiary of the Company that, as at any
time, has at such time capital equal to more than 10% of the Consolidated Net
Worth of the Company.
 
  "Mortgages" means each Mortgage, Security Agreement and Financing Statement
or Deed of Trust, Security Agreement and Financing Statement and each Amendment
to Mortgage, Security Agreement and Financing Statement or Amendment to Deed of
Trust, Security Agreement and Financing Statement, in each case made by the
Company or a Subsidiary, executed concurrently with the execution of the New
Senior Note Indenture or thereafter in favor of the New Collateral Agent on
behalf of the New Indenture Trustee, the New Collateral Agent and the holders
of New Senior Notes, encumbering the Real Estate, as the same may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced in
accordance with the terms thereof.
 
  "New Collateral Documents" mean the Security Agreement, the Pledge Agreement,
the Mortgages, the Assignments of Leases, the Collateral Assignments of
Mortgages and the Collateral Assignment of Leases, and, with respect to any of
the foregoing that may have been granted prior to the date hereof, amendments
or restatements of such documents, together with all related filings,
assignments, instruments, mortgages and other papers entered into or delivered
in connection with any of the foregoing, as such agreements, filings,
assignments, instruments, mortgages or papers or documents may from time to
time be amended, supplemented or otherwise modified in accordance with the
terms hereof and thereof.
   
  "Officers' Certificate" means a certificate signed on behalf of the Issuer by
two Officers of the Issuer, one of whom must be the President or the Executive
Vice President, and the other must be the Treasurer, an     
 
                                      121
<PAGE>
 
Assistant Treasurer, the Controller, the Secretary, an Assistant Secretary, a
Senior Vice President or a Vice President of the Issuer.
 
  "Pledge Agreement" means that certain Pledge Agreement, dated as of the date
of the New Senior Note Indenture, made by the Company, executed concurrently
with the execution of the New Senior Note Indenture, in favor of the Collateral
Agent on behalf of the New Indenture Trustee, the New Collateral Agent and the
holders of New Senior Notes, as the same may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced in accordance with the
terms thereof.
   
  "Preferred Stock", as applied to the stock of any person, means stock of any
class or classes (however designated) which is preferred as to the payment of
dividends, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such person, over shares of stock of
any other class of such person.     
 
  "Real Estate" means any interest in all plots, pieces or parcels of land
owned in any capacity, whether as a joint venturer, participant, partner or
otherwise, or in which the Issuer may have a security interest, or leased as at
the date hereof or acquired or leased hereafter by the Issuer or any
Subsidiary, including, without limitation, those listed on Schedule 1 to the
New Senior Notes Indenture and described in the Mortgages, together with all of
the buildings and other improvements now or hereafter erected on the Real
Estate, and any fixtures appurtenant thereto.
 
  "Required Holders" means the holders of a majority in principal amount of the
New Senior Notes outstanding on the date of determination.
 
  "Security Agreement" means that certain Collateral and Security Agreement,
dated as of the date of the New Senior Note Indenture made by the Company and
the Subsidiaries, executed concurrently with the New Senior Note Indenture or
thereafter, in favor of the New Collateral Agent on behalf of the New Indenture
Trustee, the New Collateral Agent and the holders of New Senior Notes, as the
same may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced in accordance with the terms thereof.
 
  "Subsidiary" means with respect to any person, any corporation, partnership
or other business entity of which an aggregate of 50% or more of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors, managers, trustees or other controlling persons is, at the time,
directly or indirectly, owned by such person and/or one or more Subsidiaries of
such person (irrespective of whether, at the time, shares of capital stock of
any other class or classes of such entity shall have or might have voting power
by reason of the happening of any contingency). Unless the context otherwise
requires, as used herein "Subsidiary" shall mean a Subsidiary of the Company.
 
  "Underlying Loan Documents" means collectively, the Underlying Promissory
Notes, the Underlying Mortgages, underlying assignments of leases and rents and
any guarantees, instruments, agreements or other documents existing on the
effective date of the Prepackaged Plan and executed by any person to or for the
benefit of the Company or any Subsidiary in connection with any loan made by
the Company or any Subsidiary to or for the benefit of such person, as the same
may have been amended, modified or supplemented.
 
  "Underlying Mortgages" means collectively, the mortgages or deeds of trust
granted by any person to or for the benefit of the Company or any Subsidiary
securing an Underlying Promissory Note or other obligation of such person, as
the same may have been or hereafter may be amended, modified or supplemented.
 
  "Underlying Promissory Notes" means the promissory notes or other instruments
evidencing the Indebtedness of any person to the Company or any Subsidiary
other than (a) promissory notes or other instruments constituting Cash
Equivalents and (b) promissory notes or other instruments evidencing
indebtedness of any person to the Company or any Subsidiary in connection with
residential loans made by the Company or any Subsidiary to such person for the
purpose of purchasing a condominium unit.
 
                                      122
<PAGE>
 
                          DESCRIPTION OF CAPITAL STOCK
   
  The Company's Declaration of Trust provides that the Company may issue up to
3,500,000 Preferred Shares and 20,000,000 Common Shares, of which 11,226,215
were outstanding as of December 31, 1994. No Preferred Shares have been issued
and the voting, dividend, liquidation and other rights or preferences of
Preferred Shares have not been fixed and are subject to the adoption by the
Board of Trustees of a resolution or resolutions fixing any such rights or
preferences. The Declaration of Trust also provides that the Company may not
issue non-voting equity securities.     
 
  Under the Prepackaged Plan, pursuant to the Amended and Restated Declaration
of Trust the authorized capital stock of the Company will consist of 20,000,000
Common Shares and 3,500,000 Preferred Shares. Giving effect to the Reverse
Stock Split, the issuance of New Common Shares, and other transactions
contemplated by the Prepackaged Plan, the Company estimates that approximately
11,226,000 Common Shares will be outstanding as of the Effective Date.
   
  All Common Shares participate equally in distributions declared by the Board
of Trustees and in net assets on liquidation after payments on the Preferred
Shares, if any, have equal voting rights and will be fully paid and non-
assessable by the Company upon issuance and sale as provided herein. The Common
Shares have no preference, conversion, exchange, preemptive or cumulative
voting rights. The Common Shares to be issued under the Prepackaged Plan will
have the same rights and characteristics of the Outstanding Common Shares,
subject to the Amended and Restated Declaration of Trust and the Reverse Stock
Split.     
 
  The Common Shares are (and, upon consummation of the Prepackaged Plan, will
continue to be) transferable in the same manner as the shares of a corporation
except that the Company may refuse to recognize transfer of shares and may
redeem shares as hereinafter set forth.
          
  For the Company to qualify as a REIT under the Internal Revenue Code, it must
meet certain requirements concerning the ownership of its outstanding shares of
capital stock. Specifically, not more than 50% in value of its outstanding
shares may be owned, either directly or under special attribution rules for
this purpose under Section 544 of the Internal Revenue Code (the "Beneficial
Attribution Rules"), by five or fewer individuals (as defined in the Internal
Revenue Code to include certain non-natural persons) during the last half of a
taxable year, and the Company must be beneficially owned (without regard to any
attribution or constructive ownership rules) by 100 or more persons during at
least 335 days of a taxable year of 12 months or during a proportionate part of
a shorter taxable year. See "Certain Federal Income Tax Consequences--REIT
Status and Taxation of Company Under the Prepackaged Plan--REIT Organizational
Requirements." In addition, the Company must meet certain requirements
regarding the nature of its gross income in order to qualify as a REIT. One
such requirement is that at least 95% of the Company's gross income for each
year must consist of rents from real property and income from certain other
investments. See "Certain Federal Income Tax Consequences--REIT Status and
Taxation of Company Under the Prepackaged Plan--Income Tests." Any rents
received by the Company from a tenant would not qualify as good income for
purposes of this 95% gross income test if the Company were to own, directly or
under special constructive ownership rules for this purpose under Section 318
of the Internal Revenue Code, as modified (the "Constructive Ownership Rules"),
10% or more of the ownership interests in the tenant. Any tenant ownership
interests owned, directly or under the Constructive Ownership Rules, by a
person who owns, directly or under the Constructive Ownership Rules, 10% or
more by value of the Company's outstanding shares would be treated as owned by
the Company for purposes of this 10% tenant limitation.     
   
  Because the Board of Trustees believe it is in the best interest of the
Company to continue to qualify as a REIT, upon the Effective Date, the Amended
and Restated Declaration of Trust will include provisions restricting the
acquisition of capital stock of the Company (the "Stock Ownership Limit
Provisions"). In particular, the Stock Ownership Limit Provisions provide that
no person (other than an Existing Holder (as hereinafter defined)) may own,
directly or under the Beneficial Attribution Rules, more than 5% of the value
of the outstanding capital stock of the Company (the "Ownership Limit"). The
Stock Ownership Limit Provisions also prohibit any transfer or other event that
would (i) result in the outstanding capital stock of     
 
                                      123
<PAGE>
 
   
the Company being beneficially owned by fewer than 100 persons (determined
without reference to any rules of attribution or constructive ownership), (ii)
cause any person (other than an Existing Holder) to own, directly or under the
Constructive Ownership Rules, more than 9.99% of the value of the outstanding
stock of the Company (the "Constructive Ownership Limit") or (iii) result in
the Company being "closely held" within the meaning of Section 856(h) of the
Internal Revenue Code. The Stock Ownership Limit Provisions exclude from the
Ownership Limit and the Constructive Ownership Limit certain major shareholders
of the Company and their affiliates ("Existing Holders"), but provide that no
Existing Holder may own, directly or under the Beneficial Attribution Rules,
more than a specified percentage determined separately for each such holder
(the holder's "Existing Holder Limit"). Except as otherwise provided below, any
acquisition or transfer of the Company's capital stock (including any
acquisition or transfer under the Beneficial Attribution Rules or Constructive
Ownership Rules) in violation of the above limits shall be null and void and
the intended transferee or owner will acquire no rights to, or economic
interest in, the shares.     
   
  Subject to certain exceptions described below, any purported transfer of or
other event that would cause a violation of the Stock Ownership Limit
Provisions will cause any Common Shares or other capital stock held in excess
of such provision to be automatically transferred, by operation of law, to a
trust for the exclusive benefit of a beneficiary or beneficiaries named by the
Company (a "Share Trust") and will be designated as "Shares-in-Trust." Any
transfer of capital stock to a Share Trust, and subsequent designation of such
capital stock as Shares-in-Trust ("Shares-in-Trust"), will be effective as of
the close of business on the business day prior to the date of the event that
results in the transfer of such capital stock to a Share Trust. Shares-in-Trust
will remain issued and outstanding capital stock of the Company and will be
entitled to the same rights and privileges on identical terms and conditions as
the capital stock so transferred. The trustee of a Share Trust, as record
holder of Shares-in-Trust, will be entitled to receive all dividends and
distributions declared by the Board of Trustees of the Company and will hold
such dividends and distributions in trust for the benefit of the beneficiary or
beneficiaries of such Share Trust. The trustee of a Share Trust will also be
entitled to vote all Shares-in-Trust and will have the exclusive right to
designate a transferee or transferees of any and all Shares-in-Trust (without
violating the Stock Ownership Limit Provisions) who will purchase the Shares-
in-Trust for valuable consideration. The Company would have the right, for a
period of 90 days after the later of (i) the date the shares are designated as
Shares-in-Trust, and (ii) the date the Company determines in good faith that a
transfer resulting in Shares-in-Trust has occurred, to purchase any or all of
the Shares-in-Trust from the trustee at the lesser of the price paid in the
transaction that created Shares-in-Trust (or, in the case of a devise, gift or
other non-transfer event, the market price on the date of such event) or the
market price for the Shares-in-Trust on the date the Company exercises its
purchase right.     
   
  All certificates representing Common Shares will bear a legend referring to
the restrictions described above. Any person who acquires or attempts to
acquire capital stock of the Company in violation of the foregoing
restrictions, or any person who owned shares that were transferred to a Share
Trust, will be required to (i) give immediate written notice to the Company of
such event and (ii) provide to the Company such other information as the
Company may request in order to determine the effect, if any, of such transfer
on the Company's status as a REIT.     
   
  All persons who own, directly or by virtue of the attribution provisions of
the Internal Revenue Code, more than 5% (or such lower percentage as is
required pursuant to regulations under the Internal Revenue Code) of the
Outstanding Common Shares shall, upon demand, file a written notice with the
Company containing the information specified in the Amended and Restated
Declaration of Trust within 30 days after January 1 of each year. In addition,
each shareholder shall, upon demand, be required to disclose to the Company in
writing such information with respect to the direct, indirect and constructive
ownership of Common Shares as the Board of Trustees deem necessary to comply
with the provisions of the Internal Revenue Code or regulations of the Treasury
Department applicable to a REIT or to comply with the requirements of any
taxing authority or governmental agency.     
 
                                      124
<PAGE>
 
   
  The Stock Ownership Limit Provisions generally will not apply to the
acquisition of capital stock by an underwriter that acquires securities of the
Company for resale. In addition, the Board of Trustees, upon receipt of a
ruling from the Internal Revenue Service or an opinion of counsel and upon such
other conditions as the Board of Trustees may direct, may, but is not required
to, exempt a person from the Ownership Limit or Existing Holder Limit under
certain circumstances if such person is not an individual or trust described in
Section 856(h)(3)(A) of the Internal Revenue Code.     
   
  Even if the REIT provisions of the Internal Revenue Code are changed so as to
no longer contain any ownership concentration limitation or if the ownership
concentration limitation is increased, except as otherwise described above, any
change in the Stock Ownership Limit Provisions would require an amendment to
the Amended and Restated Declaration of Trust. Amendments to the Amended and
Restated Declaration of Trust require the affirmative vote of holders owning
two-thirds of the outstanding Common Shares. In addition to facilitating the
Company's qualification as a REIT, the Stock Ownership Limit Provisions may
have the effect of precluding an acquisition of control of the Company without
the approval of the Board of Trustees.     
          
  Pursuant to the by-laws of the Company, annual meetings of shareholders are
normally held on the third Wednesday in February in each year unless otherwise
fixed by the Board of Trustees. Special meetings may be called by the Chairman,
a majority of trustees, or one or more shareholders holding not less than 25%
of the outstanding shares entitled to vote at the meeting. At each meeting, a
holder of Common Shares is entitled to one vote for each Common Share owned,
which means that in voting for the election of trustees, the holders of more
than 50% of the Common Shares may elect all the trustees (upon consummation of
the Prepackaged Plan) and the remainder of the shareholders may not elect any
trustees. See "The Prepackaged Plan--Summary of Other Provisions of the
Prepackaged Plan--Officers and Trustees" concerning the appointment of the new
Board of Trustees in connection with the Prepackaged Plan. Shareholders may
vote by proxy provided that proxies shall have been filed with the Secretary of
the Company before the time at which the vote shall be taken.     
   
  The Declaration of Trust provides (and, upon consummation of the Prepackaged
Plan, the Amended and Restated Declaration of Trust will continue to provide)
that shareholders shall not be subject to any personal liability for the
obligations, acts or omissions of the Company and that as far as practicable
every written undertaking made by the Company shall contain a provision that
such undertaking is not binding on any of the shareholders personally. The
Company believes that no personal liability will attach to the shareholders
under any undertaking containing such provision, except possibly in the very
few jurisdictions which decline to recognize a business trust as a valid
organization of any kind. With respect to all types of claims in the latter
jurisdictions and with respect to tort claims, contract claims where such
provision is omitted, claims for taxes and certain statutory liabilities in
other jurisdictions, a shareholder may be held personally liable to the extent
that claims are not satisfied by the Company. However, upon payment of any such
liability the shareholder would, in the absence of willful misconduct on the
shareholder's part, be entitled to reimbursement from the assets of the
Company. The Company intends to carry insurance which the trustees consider
adequate to cover any foreseeable tort claims. The trustees intend to conduct
the operations of the Company with the advice of counsel in such a way as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Company.     
   
  The Declaration of Trust provides (and, upon consummation of the Prepackaged
Plan, the Amended and Restated Declaration of Trust will continue to provide)
that no trustee or officer of the Company shall be liable to the Company or any
trustee for any act or omission of any other trustee, shareholder, officer or
agent of the Company or be held to any personal liability whatsoever in
connection with the affairs of the Company except only that arising from his
own willful misfeasance, bad faith, gross negligence or reckless disregard of
duty and that to the maximum extent that the laws of the State of Maryland in
effect from time to time permit limitation of the liability of trustees or
officers, no trustee or officer of the Company shall be liable to the Company
or its shareholders for money damages. In addition, the Declaration of Trust
provides     
 
                                      125
<PAGE>
 
   
(and, upon consummation of the Prepackaged Plan, the Amended and Restated
Declaration of Trust will continue to provide) that the Company will indemnify
the trustees and officers of the Company to the full extent permitted by the
general laws of the State of Maryland now or hereafter in force.     
 
  The First National Bank of Boston, Boston, Massachusetts, is the transfer
agent and registrar for the Company's Common Shares.
 
                                      126
<PAGE>
 
                        DESCRIPTION OF OUTSTANDING NOTES
 
GENERAL
 
  The Outstanding Notes, are secured obligations governed by the Outstanding
Note Indenture, between the Company and the Outstanding Note Trustee, dated as
of July 15, 1992. The Company's obligations under the Outstanding Note
Indenture are secured by the Outstanding Collateral Agreement, dated as of
February 21, 1991, and amended on July 15, 1992. The following summary of
certain provisions of the Outstanding Notes and the Outstanding Note Indenture
does not purport to be complete and is subject to and is qualified in its
entirety by reference to all of the provisions of the Outstanding Note
Indenture and the Outstanding Collateral Agreement including the definitions
therein of certain terms. This summary is further subject to and qualified by
reference to all of the terms and provisions of the Outstanding Collateral
Agreement described further under the caption "Security" below. Capitalized
terms used in the following summary and not otherwise defined herein shall have
the meanings ascribed to them in the Outstanding Note Indenture or the
Outstanding Collateral Amendment as applicable.
 
DENOMINATION AND MODIFICATION
   
  The Outstanding Notes were issued as uncertificated secured notes. The
Outstanding Notes were distributed pursuant to the 1992 Restructuring to each
holder of an obligation (including, without limitation, interest accrued from
and after January 31, 1991) payable by the Company to or for the benefit of any
holders of Unsecured Claims that are Allowed Claims pursuant to the Prior Plan
or the Outstanding Collateral Agreement. (a "Creditor Obligation") in an amount
equal to the principal amount of such Creditor Obligations held by such holder
on July 15, 1992 after giving effect to any payments on such date. Regularly
scheduled payments of principal, premium, if any, and interest, are payable to
holders of Outstanding Notes at the principal office of the Company in
Philadelphia, Pennsylvania, or at any paying agency maintained at the time by
the Company for such purpose. Payments to holders of Outstanding Notes are made
by wire transfer or interbank transfer of immediately available funds to such
holders. An instruction for transfer of Outstanding Notes may be presented for
registration of transfer or exchange at the Company's office in Los Angeles,
California, or at the principal trust office of the Outstanding Note Trustee in
Wilmington, Delaware or at such other location or locations as may be
established pursuant to the Outstanding Note Indenture without any service
charge but subject to the limitations provided in the Outstanding Note
Indenture.     
 
PAYMENTS
          
  Required Payments. The Outstanding Note Indenture provides for required
payments on the dates set forth below (each, a "Required Payment Date")
necessary to reduce the aggregate outstanding principal amount of Outstanding
Notes to the respective amounts set forth below:     
 
<TABLE>
<CAPTION>
                           MAXIMUM AGGREGATE
          REQUIRED            OUTSTANDING
        PAYMENT DATE          SECURITIES
        ------------       -----------------
        <S>                <C>
        July 15, 1992        $275,000,000
        December 31, 1992    $200,000,000
        June 30, 1993        $150,000,000
        December 31, 1993    $105,000,000
        June 30, 1994        $ 65,000,000
        December 31, 1994    $ 40,000,000
        June 30, 1995        $        -0-
</TABLE>
 
 
                                      127
<PAGE>
 
          
  Permitted Deferrals. The Company may, by notice to the Outstanding Note
Trustee and the holders of Outstanding Notes given at least ten days prior to
any Required Payment Date, elect to defer payment of a portion of the Required
Payment due and payable on such Required Payment Date not greater than the
amounts set forth below opposite the Required Payment Dates set forth below
(and as adjusted by certain carry-forward provisions discussed below):     
 
<TABLE>
<CAPTION>
          REQUIRED
        PAYMENT DATE         AMOUNT
        ------------       -----------
        <S>                <C>
        July 15, 1992      $50,000,000
        December 31, 1992  $40,000,000
        June 30, 1993      $30,000,000
        December 31, 1993  $11,250,000
        June 30, 1994      $10,000,000
        December 31, 1994  $ 6,250,000
        June 30, 1995      $10,000,000
</TABLE>
 
  For each Required Payment Date from July 15, 1992 to and including June 30,
1994, an amount equal to the excess, if any, of (i) the amount of any payment
permitted to be deferred (the "Permitted Deferred Payment") for such Required
Payment Date (as adjusted) over (ii) the amount actually deferred (the
"Deferred Payment") for such Required Payment Date will be added to the amount
of the Permitted Deferred Payment for the next Required Payment Date and
thereafter carried forward to each succeeding Required Payment Date until
actually deferred. Any Permitted Deferred Payment not deferred by the Company
on any such Required Payment Date that is carried forward to the December 31,
1994 Required Payment Date shall expire if not deferred on December 31, 1994.
Any Deferred Payment is due and payable on the date that is 30 months following
the Required Payment Date on which such Deferred Payment was deferred by the
Company; provided, however, that all Deferred Payments will be due and payable
on December 31, 1995.
          
  Additional Payments. Pursuant to the terms of the Outstanding Note Indenture,
the Company was or is required to pay to each holder of Outstanding Notes on
(a) July 15, 1992, (b) quarterly on the last business day of each fiscal
quarter after July 15, 1992 and (c) on the Termination Date (each, an
"Additional Payment Date") an amount equal to such holder's ratable portion of
the Available Cash as at each such Additional Payment Date.     
          
  Interest. The Company is obligated for the payment of interest on the
outstanding principal amount of Outstanding Notes from and after July 15, 1992
to and including the Termination Date, at an annual rate equal to the Adjusted
Prime Rate in effect from time to time, which was payable on July 15, 1992 and
thereafter in arrears on the last day of each Fiscal Quarter and on the
Termination Date. All Deferred Payments bear interest at the Deferred Payment
Interest Rate which is two percentage points above the Adjusted Prime Rate. In
addition, upon the occurrence and during the continuance of an Event of
Default, the outstanding principal amount of Outstanding Notes (including,
without limitation, all Deferred Payments and all Defaulted Interest) bear
interest, payable on demand, at an annual rate equal at all times to 1% above
the rate otherwise in effect from time to time. Notwithstanding the foregoing,
if at any time from and after July 15, 1992 to and including June 30, 1994, the
Adjusted Prime Rate or the Deferred Payment Interest Rate exceeds nine percent
per annum, then and for as long as either such rate exceeds nine percent per
annum, the Company is, at its option, permitted to accrue (and not currently
pay in cash) interest on account of such sums for which the interest rate
exceeds nine percent per annum, and any amounts of interest in excess of nine
percent that accrue and are not currently paid in cash continue to accrue and
are payable on December 31, 1995. Interest does not accrue on any such interest
accrued in excess of nine percent.     
          
  Application of Payments. In general, payments made by the Company under the
Outstanding Note Indenture are applied, first, to unpaid interest accrued on
the Outstanding Notes (including any interest which is payable, but is not
punctually paid or duly provided for ("Defaulted Interest") and excepting
Deferred     
 
                                      128
<PAGE>
 
Interest), second, to the outstanding balance of any Deferred Payments, if due
and payable, and, at the election of the Company, to any remaining outstanding
balance of any Deferred Payments, whether or not due and payable, third, to the
outstanding principal balance of the Outstanding Notes, in the order of
maturity of each of the Required Payments, fourth, to Deferred Interest, if
any, and fifth, to any remaining outstanding balance of any Deferred Payments,
whether or not due and payable. Payments applied to the outstanding balance of
any Deferred Payments are applied first to the Deferred Payments that have been
outstanding for the longest period of time.
 
CERTAIN COVENANTS OF THE COMPANY
 
  The Outstanding Note Indenture contains covenants which, among other things,
(i) restrict investment, capital expenditures and other material outlays and
commitments relating thereto, (ii) restrict the incurrence of debt, (iii)
restrict dividends or and repurchases of capital stock, (iv) restrict mergers
and acquisitions and changes of business or conduct of business, (v) restrict
transactions with affiliates, (vi) restrict certain sales of assets or the
conduct of sales of assets, (vii) require maintenance of certain financial
ratios and levels, including capital ratios and total debt ratios, (viii) limit
the Company's ability to incur liens on its assets and (ix) limit the Company's
ability to incur lease obligations.
 
  The following is a summary of certain of the covenants contained in the
Outstanding Note Indenture:
 
  Ratio of Outstanding Securities to Capital Base. The Company is required to
maintain at the end of each Fiscal Quarter a ratio (expressed as a percentage)
of (a) the aggregate principal amount of Outstanding Securities to (b) the
Capital Base, for the periods set forth below, equal to or less than the
respective percentages set forth below:
 
<TABLE>
<CAPTION>
         PERIOD                                              REQUIRED PERCENTAGE
         ------                                              -------------------
   <S>                                                       <C>
   July 15, 1992 - December 30, 1992........................         632%
   December 31, 1992 - June 29, 1993........................         515%
   June 30, 1993 - December 30, 1993........................         438%
   December 31, 1993 - June 29, 1994........................         358%
   June 30, 1994 - December 30, 1994........................         313%
   December 31, 1994 - June 29, 1995........................         209%
   June 30, 1995 and thereafter.............................         102%
</TABLE>
 
  Ratio of Earning Assets to Outstanding Securities. The Company is required to
maintain at the end of each Fiscal Quarter a ratio (expressed as a percentage)
of (a) Earning Assets to (b) the aggregate principal amount of Outstanding
Securities, for the periods set forth below, equal to or greater than the
respective percentages set forth below:
 
<TABLE>
<CAPTION>
         PERIOD                                              REQUIRED PERCENTAGE
         ------                                              -------------------
   <S>                                                       <C>
   July 15, 1992 - December 30, 1992........................          96%
   December 31, 1992 - June 29, 1993........................         105%
   June 30, 1993 - December 30, 1993........................         113%
   December 31, 1993 - June 29, 1994........................         116%
   June 30, 1994 - December 30, 1994........................         117%
   December 31, 1994 - June 29, 1995........................         120%
   June 30, 1995 and thereafter.............................         131%
</TABLE>
 
  Expenses. The Company will not permit or suffer to exist the sum of actual
"Operating expenses of rental properties" and "Other operating expenses
(excluding professional expenses)" as described in a Form 10-Q for the Company
to exceed the sum of budgeted "Operating expenses of rental properties" and
"Other
 
                                      129
<PAGE>
 
operating expenses (excluding professional expenses)" as set forth on an annual
budget approved by the trustees of the Company by more than 10% for each Fiscal
Quarter and by more than 10% for each Fiscal Year.
 
  Non-Earning Assets. At the respective dates set forth below, the amount of
Non-Earning Assets maintained by the Company is not permitted to exceed the
respective amounts set forth below:
 
<TABLE>
<CAPTION>
     PERIOD                                                     AGGREGATE AMOUNT
     ------                                                     ----------------
   <S>                                                          <C>
   December 31, 1992...........................................   $90,000,000
   June 30, 1993...............................................   $75,000,000
   December 31, 1993...........................................   $60,000,000
</TABLE>
 
  In the event that at any specified date the amount of Non-Earning Assets
maintained by the Company exceeds the Permitted Non-Earning Assets for such
date, then within 45 days after such date, the Company is required to pay to
each holder of Outstanding Notes its proportionate share (as determined by the
outstanding principal amounts of Outstanding Notes held by each holder) of the
product of (i) the excess of (A) the Non-Earning Assets on such date set forth
above, over (B) the Permitted Non-Earning Assets for such date and (ii) 0.015.
 
  Limitation on Existing Advances and Investments; Prohibition Against New
Investments. The Company is not permitted to fund any Investment under any
Contractual Obligation existing on the effective date of the Outstanding Note
Indenture, except in accordance with, and subject to certain existing maximum
amounts set forth in the Outstanding Note Indenture. The Company is not
permitted to, directly or indirectly, become party or subject to any new
Contractual Obligation to fund an Investment in or to any Person from and after
the effective date of the Outstanding Note Indenture. Notwithstanding the
foregoing, the Company may fund (i) Investments under Qualified Contractual
Obligations that constitute increases in maximum amounts of such Qualified
Contractual Obligations; provided, however, that with respect to Underlying
Mortgages, such Investments, which constitute actual cash outlays in excess of
existing commitments pursuant to the Underlying Mortgages, may not exceed in
the aggregate (x) $5,000,000 from and after July 15, 1992, to and including
December 31, 1992, (y) $3,500,000 from and after January 1, 1993, to and
including December 31, 1993, and (z) $2,000,000 annually thereafter; and (ii)
Investments which constitute capital expenditures, leasing commissions and
tenant improvements, related to the ownership and maintenance of a parcel or
parcels of Real Estate in an amount not to exceed, by more than 10%, the amount
of such expenses set forth on a budget approved by the trustees of the Company
and subsequently submitted to and not objected to by the Required Holders.
 
  The Company is not permitted to, directly or indirectly, fund or otherwise
make any Investment, except: (i) Investments expressly permitted or required
under the Outstanding Note Indenture; (ii) Investments of Available Cash in
Cash Equivalents; (iii) Investments created by the Company as a result of sale,
refinancing or disposition of assets when the Company accepts in partial
payment of an outstanding obligation a new mortgage or equity interest in the
same property; and (iv) Investments in Subsidiaries formed or maintained
pursuant to the Outstanding Note Indenture.
 
  Indebtedness. The Company is not permitted to, directly or indirectly, incur,
create, assume or suffer to exist any Indebtedness, except: (a) the Outstanding
Notes and the Additional Cash Consideration; (b) Contingent Obligations
constituting endorsements for collection or deposit in the ordinary course of
business; (c) current liabilities in respect of taxes, assessments and
governmental charges or levies incurred, or claims for labor, materials,
inventory, services, supplies and rentals incurred, or for goods or services
purchased, in the ordinary course of business consistent with the past practice
of the Company; (d) Indebtedness arising under any performance bond
reimbursement obligation entered into in the ordinary
 
                                      130
<PAGE>
 
   
course of business of the Company consistent with the past practice of the
Company; (e) unimpaired indemnification claims under the Declaration of Trust
of the Company; and (f) Indebtedness arising in connection with Subsidiaries
formed or maintained pursuant to the Outstanding Note Indenture.     
 
  Restricted Payments. The Company is not permitted to (a) declare or make any
dividend payment or other distribution of assets, properties, cash, rights,
obligations or securities on account of or in respect of any of its Common
Shares, except so long as there is no Default or Event of Default (i) such
minimum declaration and making of dividend payments required for the Company to
preserve its status as a REIT or (ii) the inadvertent making of Dividend
Overpayments or (b) purchase, redeem, prepay, defease or otherwise acquire for
value or make any payment on account or in respect of its Common Shares,
whether outstanding on the effective date of the Outstanding Note Indenture or
thereafter issued and outstanding.
 
REDEMPTION
 
  The Company is required to redeem the Outstanding Notes pursuant to the
schedule of Required Payments and Permitted Deferrals described above under the
caption "--Payments." In addition, the Company may, upon at least five business
days' prior notice to the Outstanding Note Trustee (unless a shorter notice
shall be satisfactory to the Outstanding Note Trustee) and the holders of
Outstanding Notes stating the proposed date and aggregate principal amount of
the redemption, and if such notice is given, the Company shall, prepay the
outstanding principal balance of the Outstanding Notes, in whole or in part,
together with accrued interest to the date of such redemption on the
outstanding balance prepaid without penalty in amounts not less than $1,000,000
or integral multiples in excess thereof.
 
SECURITY
 
  Pursuant to the 1992 Restructuring, on the effective date of the 1992
Restructuring (July 15, 1992) the liens then existing against the collateral
securing the Creditor Obligations pursuant to the Collateral Agreement dated as
of February 21, 1991 were continued pursuant to the Outstanding Note Indenture
and the Outstanding Collateral Agreement. Such documents provided that, without
further action, upon the effective date of the 1992 Restructuring such liens
continued to secure the Outstanding Notes as modified under the Outstanding
Note Indenture as it may be amended, modified, supplemented or replaced from
time to time. The Company executed, delivered and caused to be recorded, as
necessary, all agreements, instruments and other documents necessary to effect
the continuation of liens contemplated by the Outstanding Collateral Agreement
and the Outstanding Note Indenture and agreed to fully cooperate and take such
action as the Outstanding Note Trustee may request from time to time to
maintain the continued perfection of such liens.
 
  Pursuant to the 1992 Restructuring, the terms of the Outstanding Notes were
modified. Under applicable law relating to the priority of liens, modification
of debt may adversely affect the priority of liens securing the original debt.
New mortgages were not recorded and new policies of title insurance, or the
like, were not obtained with respect to the existing liens as part of the 1992
Restructuring. Although as part of the 1992 Restructuring the Company
represented and warranted to the holders of Outstanding Notes that there were
no intervening liens and that the Prior Plan prohibited such liens, there can
be no assurance that there were no intervening liens or that if such
intervening liens existed, the liens securing the Outstanding Notes retained
their priority after the 1992 Restructuring.
          
  Certain Amendments to the 1991 Collateral Agreement. As part of the 1992
Restructuring, the Company and the holders of the Outstanding Notes provided
for the collateral securing the Creditor Obligations (and, as a result of the
1992 Restructuring, the Outstanding Notes) to be subject to the terms and
provisions of the Outstanding Note Indenture as well as the Outstanding
Collateral Agreement and the Amended Plan, and the Company confirmed,
reaffirmed and ratified that the rights, including the liens and security
interests against the collateral, that the holders of the Outstanding Notes
were granted under the Prior Plan continued     
 
                                      131
<PAGE>
 
   
to secure the Company's obligations in respect of the Outstanding Notes as
modified by the 1992 Restructuring. The 1992 Restructuring amendments to the
Outstanding Collateral Agreement and the Security Agreement, dated as of
February 21, 1991 provided, among other things, for: (a) a mechanism for the
Outstanding Note Trustee to obtain the consent of the holders of Outstanding
Notes to allow the Company to take certain actions with respect to the
collateral securing the Outstanding Notes if such actions are not otherwise
provided for in the Outstanding Collateral Agreement or the Prior Plan, and (b)
the Company to have certain rights to service and otherwise deal with the
collateral securing the Outstanding Notes without the approval of the holders
of Outstanding Notes, so long as no Event of Default has occurred and is
continuing, including the right to take title to (i) a mortgage or equivalent
security then held by the Company or acquired in connection with property held
by the Company in a wholly-owned Subsidiary organized solely for the purpose of
foreclosing upon such mortgage or equivalent security or (ii) Real Estate which
is the subject of a lien of a mortgage or equivalent security then held by the
Company or acquired in connection with property held by the Company for the
purpose of holding and operating such Real Estate in a wholly owned Subsidiary
organized solely for the purpose of holding and operating such Real Estate,
provided that the Company or such Subsidiary delivers to the Outstanding
Collateral Agent, at the time of taking title in such Subsidiary, (w) a
mortgage lien upon the Real Estate, (x) a pledge of 100% of the issued and
outstanding stock of such Subsidiary, (y) a legal opinion of the Company's
counsel as to the Company's compliance with the foregoing or other evidence
reasonably satisfactory to the holders of Outstanding Notes and (z) all
necessary documents and instruments necessary to grant to the Outstanding
Collateral Agent a valid, perfected and enforceable security interest in the
assets and stock of such Subsidiary.     
 
AMENDMENT, SUPPLEMENT AND WAIVER
 
  The Outstanding Note Indenture may be amended or supplemented with the
consent of the Required Holders and any past default and its consequences may
be waived with the consent of the Required Holders; provided that, without the
consent of each holder, no such amendment, supplement or waiver may change the
maturity of the principal of, or any installment of principal of or interest
on, any Outstanding Note, or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or reduce,
waive or change the time for making any payment required on account of Non-
Earning Assets in excess of certain agreed amounts or reduce the aforesaid
percentage of principal amount of Outstanding Notes whose holders must consent
to an amendment, supplement or waiver. Without the consent of any holder of
Outstanding Notes, the Company and the Outstanding Note Trustee may amend or
supplement the Outstanding Note Indenture to, among other things, evidence
succession of another corporation to the Company to the extent otherwise
permitted under the Outstanding Note Indenture or to cure any ambiguity,
correct or supplement any provision of the Outstanding Note Indenture
inconsistent with other provisions thereof or make any other provision which
does not adversely affect the interests of the holders of Outstanding Notes.
 
EVENTS OF DEFAULT
 
  The Outstanding Note Indenture defines an Event of Default as being any one
of the following events: (a) a default in any payment on the Outstanding Notes
or any payment to holders of Creditor Obligations under the Prior Plan when the
same becomes due and payable; (b) any representation or warranty of the Company
under the Outstanding Note Indenture or the Outstanding Collateral Agreement
that is incorrect in any material respect; (c) a default in the performance of
any term, covenant or agreement of the Company (subject in certain cases to a
30-day cure period); (d) the Company fails to pay any principal of or premium
or interest on any of its Indebtedness in an amount exceeding $1,000,000
(excluding the Outstanding Notes), when the same becomes due and payable, or
any other event occurs or condition exists under any agreement or instrument
relating to any such Indebtedness, if the effect of such event or condition is
to accelerate, or to permit the acceleration of, the maturity of such
Indebtedness; or any such Indebtedness is declared to be due and payable, or
required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof; (e) bankruptcy, insolvency,
reorganization or other similar events; (f) any
 
                                      132
<PAGE>
 
   
judgment or order for the payment of money in excess of $1,000,000 rendered
against the Company and either enforcement proceedings have been commenced by
any creditor upon such judgment or order, or there is any period of 10
consecutive days during which a stay of enforcement of such judgment or order
by reason of a pending appeal or otherwise, is not in effect; and (g) except
for releases of collateral pursuant to Permitted Financings or Asset Sales, the
Outstanding Note Indenture or the Outstanding Collateral Agreement, for any
reason, ceases to create a valid Lien on collateral having a value of
$10,000,000 or more purported to be covered thereby, or such Lien ceases to
have the priority Lien status initially granted and be a perfected Lien as to
collateral having a value of $10,000,000 or more. If an Event of Default occurs
and is continuing, then (i) if such Event of Default is the result of
bankruptcy, insolvency, reorganization or similar events, the principal amount
of all Outstanding Notes and all obligations of the Company under the
Outstanding Note Indenture and the plan of reorganization then in effect shall
be automatically accelerated and (ii) in every other case, the Outstanding Note
Trustee may, and upon the direction from the Required Holders shall, declare
the principal amount of the Outstanding Notes and all obligations of the
Company under the Outstanding Note Indenture and the plan of reorganization
then in effect to be due and payable immediately, but under certain conditions
such acceleration may be rescinded by the Required Holders.     
   
  No holder of any Outstanding Note has any right to institute any proceeding
with respect to the Outstanding Note Indenture or for any remedy thereunder,
unless (i) the Required Holders previously shall have given to the Outstanding
Note Trustee written notice of an Event of Default, (ii) the Required Holders
shall have made written request upon the Outstanding Note Trustee, (iii) such
holder shall have offered indemnity satisfactory to the Outstanding Note
Trustee to institute such proceeding as Outstanding Indenture Trustee, (iv) the
Outstanding Note Trustee for ten Business Days shall have failed to institute
such proceeding and (v) during such ten day period the Required Holders shall
not have issued a direction inconsistent with such prior request. However, the
right of any holder of any Outstanding Note to institute suit for enforcement
of any payment of principal of, and premium and interest on, such Outstanding
Note on or after the due date expressed in such Outstanding Note, may not be
impaired or affected without such holder's consent.     
 
  The Required Holders may direct the time, method and place of conducting any
proceeding for any remedy available to the Outstanding Note Trustee or
exercising any trust or power conferred on the Outstanding Note Trustee with
respect to Outstanding Notes. However, the Outstanding Note Trustee may refuse
to follow any such direction that conflicts with any rule of law or the
Outstanding Note Indenture. Before proceeding to exercise any right or power
under the Outstanding Note Indenture at the direction of the Required Holders,
the Outstanding Note Trustee shall be entitled to receive from the holders
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in its compliance with any such direction. If an
Event of Default shall occur, the Outstanding Note Trustee shall give notice
thereof to the Outstanding Collateral Agent and may direct the Outstanding
Collateral Agent to enforce any right under the Outstanding Collateral
Agreement.
 
  The Company will be required under the Outstanding Note Indenture to notify
the Outstanding Note Trustee and the holders within five business days of the
existence of any default under the Outstanding Note Indenture of which any
officer of the Company is aware. In addition, the Company will be required to
furnish to the Outstanding Note Trustee within 45 days after the end of each
fiscal year, a statement as to whether any default under the Outstanding Note
Indenture occurred during the fiscal year.
 
MERGER; SALE OF ASSETS; PERMITTED FINANCINGS
          
  Merger. Under the Outstanding Note Indenture, the Company may not (i) merge
with any Person, (ii) consolidate with any Person, (iii) acquire all or
substantially all of the stock or stock equivalents of any Person, (iv) acquire
all or substantially all of the assets of any Person, or (v) enter into any
joint venture or partnership with any Person.     
       
                                      133
<PAGE>
 
   
  Sale of Assets. The Company is permitted to dispose of assets subject to
compliance with certain procedures in the Outstanding Collateral Agreement;
provided, however, that all cash Asset Sale Proceeds are required to be
deposited in a trust account held by the Outstanding Collateral Agent
immediately upon receipt by the Company or its agent, and all non-cash Asset
Sale Proceeds are required to be delivered immediately to the Outstanding Note
collateral agent upon receipt by the Company or its agent. Subject to required
Additional Payments of Available Cash, the Company may have the use of the
Asset Sale Proceeds (together with any interest thereon) up to an aggregate of
$10,000,000 in any one Fiscal Quarter, provided, that the chief financial
officer of the Company furnishes to the Outstanding Note Trustee, the
Outstanding Note collateral agent and the holders of Outstanding Notes a
certificate stating that there is no existing Default or Event of Default and
that such Asset Sale Proceeds are to be used in accordance with the terms and
provisions of the Outstanding Note Indenture.     
          
  Permitted Financings. With the prior written consent of the Required Holders
(which consent may be given or withheld for any reason), the Company may sell,
otherwise dispose of, refinance or otherwise transfer any of its property as
part of a financing transaction that satisfies certain provisions limiting
application of proceeds (a "Permitted Financing"). In order for any proposed
financing transaction to be considered a Permitted Financing, the terms of such
financing transaction must provide that (i) the Company shall apply
substantially all of the net cash proceeds generated from such financing
transaction in the same manner provided for regularly scheduled principal and
interest payments and (ii) 100% of any non-cash proceeds shall be pledged as
collateral to the Outstanding Collateral Agent pursuant to the Outstanding
Collateral Agreement for the benefit of the holders of Outstanding Notes.     
 
RESTRICTIONS ON TRANSFER
   
  The Company is not required to register the transfer or exchange of
Outstanding Notes if the aggregate amount of Outstanding Notes being
transferred or exchanged pursuant to such transfer or exchange is less than
$5,000,000 or is not an integral multiple of $1,000,000 in excess thereof
(unless the transfer or exchange shall be of a holder's entire interest in the
Outstanding Notes), or unless the transferee or recipient of such exchange is
at such time a holder or is a Qualified Institutional Buyer as defined under
Rule 144A promulgated under the Securities Act. No Outstanding Notes may be
sold, transferred, negotiated or assigned to bearer.     
 
SATISFACTION AND DISCHARGE
 
  The Outstanding Note Indenture will cease to be of further effect (except as
to any surviving rights of registration of transfer or exchange of Outstanding
Notes therein expressly provided for), and the Outstanding Note Trustee, upon
written request by the Company, at the expense of the Company, will execute
proper instruments acknowledging satisfaction and discharge of the Outstanding
Note Indenture, when (1) either (A) all Outstanding Notes theretofore issued
(other than Outstanding Notes for whose payment money has theretofore been
deposited in trust with the Trustee for the benefit of the holders of
Outstanding Notes) have been cancelled and marked as such in the security
register in accordance with the terms of the Outstanding Note Indenture; or (B)
all such Outstanding Notes not theretofore cancelled and marked as such in the
security register (i) have become due and payable, or (ii) will become due and
payable at their stated maturity within one year, or (iii) are to be called for
redemption within one year under arrangements satisfactory to the Outstanding
Note Trustee for the giving of notice of redemption by the Outstanding Note
Trustee in the name, and at the expense, of the Company, and the Company, in
the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be
deposited with the Outstanding Note Trustee as trust funds in trust for the
benefit of the holders of Outstanding Notes for the purpose an amount
sufficient to pay and discharge the entire indebtedness on such Outstanding
Notes not theretofore cancelled, for principal (and premium, if any) and
interest, if any, to the date of such deposit (in the case of Outstanding
 
                                      134
<PAGE>
 
Notes which have become due and payable) or to the stated maturity or
redemption date, as the case may be; (2) the Company has paid or caused to be
paid all other sums payable hereunder or under the Prior Plan by the Company;
(3) no default or event of default shall have occurred and be continuing on the
date of such deposit; and (4) the Company has delivered to the Outstanding Note
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent herein provided for relating to the satisfaction and
discharge of the Outstanding Note Indenture have been complied with.
 
THE OUTSTANDING NOTE TRUSTEE AND COLLATERAL AGENT
   
  The Outstanding Note Trustee is also presently the Outstanding Collateral
Agent under the Outstanding Collateral Agreement. The Outstanding Note Trustee
may be removed as trustee under the Outstanding Note Indenture by the Required
Holders and may be removed as collateral agent under the Outstanding Collateral
Agreement by the Required Holders.     
 
CERTAIN DEFINITIONS
 
  Set forth below are certain terms contained in the Outstanding Note
Indenture, modified where appropriate to use terms as defined elsewhere in this
Disclosure Statement.
 
  "Adjusted Prime Rate" means, for the periods set forth below, a floating
annual rate of interest equal to the rates set forth below:
 
<TABLE>
<CAPTION>
        PERIOD                                                   RATE
        ------                                                   ----
   <S>                                                <C>
   July 15, 1992 - December 31, 1992................. Reference Rate, plus 1.75%
   January 1, 1993 - June 30, 1993................... Reference Rate, plus 2.00%
   July 1, 1993 - December 31, 1993.................. Reference Rate, plus 2.25%
   January 1, 1994 - June 30, 1994................... Reference Rate, plus 2.50%
   July 1, 1994 - December 31, 1994.................. Reference Rate, plus 2.75%
   January 1, 1995 - June 30, 1995................... Reference Rate, plus 3.00%
   From and after July 1, 1995....................... Reference Rate, plus 3.25%
</TABLE>
 
  "Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person and includes each officer, director, trustee
or general partner of such person, and each owner of 5% or more of any class of
voting stock or interests of such person. For the purposes of this definition,
"control", when used with respect to any specified person, means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
 
  "Available Cash" means, as at any date of determination, all cash and Cash
Equivalents held by the Company, any Subsidiary or the collateral agent under
the Outstanding Collateral Agreement, including, without limitation, cash and
Cash Equivalents held in the Asset Sale Account or in any Deposit Account (as
defined in the Outstanding Collateral Agreement) in excess of $10,000,000 less
the amount of Dividend Overpayments, if any, during the period following the
Effective Date.
 
  "Asset Sale" means any sale or other disposition, or series of sales or other
dispositions, made on or after the Effective Date by the Company or any
Subsidiary to any person of any Collateral. For the purposes hereof, any
prepayment or payment at maturity of a Promissory Note shall be deemed to be an
"Asset Sale."
 
  "Asset Sale Proceeds" means payments in cash or other property (including
securities) received by the Company or any Subsidiary (including, without
limitation, any cash payments received by way of deferred payment of principal
pursuant to a note or receivable or otherwise, but only as and when received)
from any Asset Sale (after repayment of any Indebtedness required to be paid by
reason of such Asset Sale) or any
 
                                      135
<PAGE>
 
Permitted Financing which has been approved by the Required Holders pursuant to
Outstanding Note Indenture (after application of such Permitted Financing
proceeds in accordance with Outstanding Note Indenture) or otherwise, in each
case net of the amount of (a) reasonable brokers' and advisors' fees and
commissions actually paid other than to an Affiliate of the Company, (b) all
foreign, federal, state and local taxes actually payable by the Company as a
direct consequence of such Asset Sale, (c) the reasonable fees and expenses
attributable to such Asset Sale, to the extent not included in clause (a),
except to the extent paid to any Affiliate of the Company and (d) any
proportionate share of the proceeds required to be paid to any person owning a
beneficial interest in the property or assets sold pursuant to such Asset Sale.
 
  "Capital Base" means, as at any date of determination, an amount equal to the
difference of (a) the sum of (i) the aggregate par value of the capital stock
of the Company (and any Subsidiary) as at such date of determination, plus (ii)
the paid in capital and earned surplus of the Company (and any Subsidiary) as
at such date of determination, minus (b) 50% of the Non-Earning Assets as at
such date of determination.
 
  "Cash Equivalents" means, collectively, (a) securities with maturities of 90
days or less from the date of acquisition issued or fully guaranteed or insured
by the United States government or any agency thereof, (b) certificates of
deposit, overnight bank deposits and bankers' acceptances of any commercial
bank having combined capital and surplus of at least $200,000,000, a short term
deposit rating of A1/P1 or better and organized under the laws of the United
States of America having maturities of 90 days or less from the date of
acquisition and (c) commercial paper with maturities of 90 days or less having
a rating of A1/P1 or better.
 
  "Collateral" means all property and interests in property, real or personal
and tangible or intangible, and all rents, issues, profits and proceeds thereof
held by the Company or any Subsidiary as at the effective date of the Plan or
acquired thereafter.
 
  "Contingent Obligation" means with reference to any person, any direct or
indirect liability, contingent or otherwise, of such person with respect to any
Indebtedness or Contractual Obligation of another person, if the purpose or
intent of such person in incurring the Contingent Obligation is to provide
assurance to the obligee of such Indebtedness or Contractual Obligation that
such Indebtedness or Contractual Obligation will be paid or discharged, or that
any agreement relating thereto will be complied with, or that any holder of
such Indebtedness or Contractual Obligation will be protected (in whole or in
part) against loss in respect thereof.
 
  "Contractual Obligation" means with reference to any person, any obligation,
agreement, undertaking or similar provision of any security issued by such
person or of any agreement, undertaking, contract, lease, indenture, mortgage,
deed of trust or other instrument to which such person is a party or by which
it or any of its property is bound or to which any of its properties is
subject.
 
  "Dividend Overpayments" means, as at any date of determination, an amount
equal to the aggregate amount of dividends paid by the Company in excess of the
minimum amount which was required to preserve its status as a real estate
investment trust under the Internal Revenue Code.
 
  "Earning Assets" means, as at any date of determination, an amount equal to
the difference of (a) Invested Assets as at such date of determination and (b)
the aggregate amount of Non-Earning Loans and Non-Earning Properties as at such
date of determination.
 
  "Indebtedness" means with reference to any person (a) all indebtedness of
such person for borrowed money (including, without limitation, reimbursement
and all other obligations with respect to surety bonds, letters of credit and
bankers' acceptances, whether or not matured) or for the deferred purchase
price of property or services (other than normal trade accounts payable
incurred in the ordinary course of business), (b) all obligations of such
person evidenced by notes, bonds, debentures or similar instruments, (c) all
indebtedness of such person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
person (even though the rights and remedies of the seller or lender
 
                                      136
<PAGE>
 
under such agreement in the event of default are limited to repossession or
sale of such property), (d) all capitalized lease obligations of such person,
(e) all Contingent Obligations of such person, (f) all obligations of such
person under interest rate contracts, (g) all indebtedness referred to in
clause (a), (b), (c), (d), (e) or (f) above of such person secured by (or for
which the holder of such indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien against property or an interest in
property owned by such person, even though such person has not assumed or
become liable for the payment of such indebtedness, and (h) in the case of the
Company, the Outstanding Notes.
 
  "Investment" means any advance, loan, extension of credit or capital
contribution to, or purchase of any stocks, bonds, notes, debentures or other
securities of, or interest in, any person, any purchase of any interest in Real
Estate (other than by foreclosure, deed in lieu of foreclosure or other method
of realizing on security) or any commitment or other obligation, whether
contingent or absolute, to do any of the foregoing, which commitment or other
obligation does not constitute a Contingent Obligation.
 
  "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever, including, without limitation, any
conditional sale or other title retention agreement, the interest of a lessor
under a capitalized lease obligation, any financing lease having substantially
the same economic effect as any of the foregoing, and the filing, under the
Uniform Commercial Code or comparable law of any jurisdiction, of any financing
statement naming the owner of the asset to which such Lien relates as debtor.
 
  "Net Cash Value" means, total cash investment in respect of a property, net
of any write-offs of the cash investment in such property, before the allowance
for accumulated depreciation.
 
  "Non-Earning Assets" means, at any date of determination, the aggregate of
Non-Earning Loans and Non-Earning Properties.
   
  "Non-Earning Loans" means, all of the Company's (a) notes and receivables on
which payment of interest or a contractual payment of principal is more than 60
days past due, (b) loans on which extensions (generally, where principal has
been increased or cumulative extensions of maturity for more than 24 months has
been granted or suffered) have been granted, (c) loans which the Company has
classified as non-accrual, and (d) loans on which the Company has reduced the
rate of interest so that the current cash payments yield an annualized return
of 5% or less, subject to temporary exclusion of certain of such assets upon
certification by the chief financial officer of the Company which would yield
an annualized return of five percent (5%) or more, calculated as if foreclosure
proceedings were otherwise completed and on the basis of Net Cash Value, for
the first six months after such certification date.     
 
  "Non-Earning Properties" means, as at any date of determination, any and all
Real Estate held by the Company that has not, on an individual basis, generated
for two consecutive Fiscal Quarters net Operating Income sufficient to yield an
annualized return of 5% or more, calculated on the basis of Net Cash Value of
the investment in such Real Estate. Notwithstanding the foregoing, at the date
of determination with respect to any property held for less than six months, if
the Company provides the Creditors' Committee with a certificate of the chief
financial officer stating that the Company reasonably believes that such
property will yield an annualized return of 5% or more, calculated as
aforesaid, for the first six months after acquisition, then such property shall
not be a Non-Earning Property.
 
  "Promissory Note" means the promissory notes or other instruments evidencing
the Indebtedness of any person to the Company other than (a) promissory notes
or other instruments constituting Cash Equivalents and (b) promissory notes or
other instruments evidencing indebtedness of any person to the Company in
connection with residential end loans made by the Company to such person for
the purpose of purchasing a condominium unit.
 
 
                                      137
<PAGE>
 
  "Real Estate" means any interest in all of those plots, pieces or parcels of
land owned in any capacity, whether as a joint venturer, participant, partner
or otherwise, or leased as at the date hereof or acquired thereafter by the
Company, including, without limitation, those listed in the Outstanding Note
Indenture and described in the mortgages or equivalent security instruments
executed and delivered in connection with the Outstanding Note Indenture,
together with all of the buildings and other improvements now or hereafter
erected on the Real Estate, and any fixtures appurtenant thereto.
   
  "Reference Rate" means the rate of interest publicly announced from time to
time by Bank of America in San Francisco, California, as its reference rate.
The reference rate is a rate set by Bank of America based upon various factors,
including, without limitation, Bank of America's costs and desired return,
general economic conditions and other factors and is used as a reference point
for pricing some loans, which may be priced at, above, or below such announced
rate. Any change in the reference rate announced by Bank of America shall take
effect at the opening of business on the day specified in the public
announcement of such change.     
 
  "Required Holders" means the holders of at least 66 2/3% in principal amount
of the Outstanding Notes on the date of determination.
 
  "Subsidiary" means any corporation of which the Company, directly and/or
indirectly through one or more Subsidiaries owns 50% or more of the shares of
voting stock. For the purposes of this definition, "voting stock" means stock
of the class or classes having general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of a corporation (irrespective of whether or not at the time stock
of any other class or classes shall have or might have voting power by reason
of the happening of any contingency).
 
  "Termination Date" means that date on which all of the Outstanding Notes are
paid in full and all amounts owing under the Outstanding Note Indenture and the
Prior Plan are paid in full.
 
  "Underlying Mortgages" means collectively, the mortgages or deeds of trust
granted by any person to or for the benefit of the Company securing a
Promissory Note of such person, as the same may have been amended, modified or
supplemented.
 
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<PAGE>
 
                    CERTAIN FEDERAL INCOME TAX CONSEQUENCES
   
  The material federal income tax consequences of the Prepackaged Plan under
the Internal Revenue Code are described below. The state and local income tax
consequences of the Prepackaged Plan are not discussed herein. Due to the
unsettled nature of several of the tax issues presented by the Prepackaged
Plan, the differences (even among holders of Outstanding Common Shares and
among creditors within the same creditor class) in the nature of the claims of
the various creditors or holders of Outstanding Common Shares, their taxpayer
status, residence, and methods of accounting and prior actions taken by
creditors with respect to their claims, as well as the possibility that events
subsequent to the date hereof, including amendments to the Internal Revenue
Code, Regulations thereunder or court decisions, could change the federal tax
consequences of the transactions, the tax consequences described below are
general descriptions and subject to significant uncertainties. The Company has
not sought, nor does it intend to seek, a ruling from the Internal Revenue
Service. Consequently, there can be no assurance that the treatment set forth
below will be accepted by the Internal Revenue Service.     
 
ACCORDINGLY, HOLDERS OF CLAIMS AND OUTSTANDING COMMON SHARES ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THE FEDERAL, STATE AND
LOCAL TAX CONSEQUENCES OF THE PREPACKAGED PLAN WITH RESPECT TO THEIR CLAIM OR
EQUITY INTEREST.
 
TAX CONSEQUENCES TO CREDITORS
   
  The federal income tax consequences to creditors arising from the Prepackaged
Plan will vary depending upon, among other things, whether or not a creditor's
Claim is an obligation classified as a Tax Security. The term "security" is not
defined in the Internal Revenue Code, but is generally regarded as stock or a
debt instrument due more than 10 years from the date of issuance. However, the
precise limits are unclear and an instrument with an original term of as little
as 5 years (or even less) may also qualify. All creditors who receive New
Common Shares pursuant to the Prepackaged Plan should consult their tax
advisors to determine whether their Claims constitute securities for federal
income tax purposes.     
   
  Claims Not Constituting Tax Securities. The tax treatment of a creditor whose
Claim is not classified as a Tax Security for federal income tax purposes (as
described above) on the exchange of such a Claim (other than any Claim for
interest) for cash or property will depend on several issues. A holder will
recognize gain or loss equal to the difference between the holder's "amount
realized," i.e., the sum of the amount of cash received, the issue price of new
debt instruments received the fair market value of stock and other property
received, and its adjusted tax basis in its Claim. The tax basis of property
received by creditors with respect to Claims that do not constitute Tax
Securities (other than with respect to Claims for interest) will be the amount
of such property that is included in the holder's amount realized on the
exchange. The holding period for property received in the exchange will begin
on the day following the exchange.     
   
  Claims Constituting Tax Securities. If the Prepackaged Plan as confirmed does
not qualify as a "reorganization" under the Internal Revenue Code, creditors
whose Claims constitute Tax Securities will be treated the same as creditors
whose Claims do not constitute Tax Securities. The Company expects the
Prepackaged Plan will constitute a "tax-free recapitalization" under Internal
Revenue Code section 368(a)(1)(E) as to the Company and that the New Senior
Notes will constitute Tax Securities. In that event, holders of Tax Securities
who receive New Common Shares, New Senior Notes, or both, will generally not
recognize gain or loss, subject to certain exceptions. First, income or loss
will be recognized to the extent that the value received for accrued interest
is more or less than the amount of accrued interest previously included in
income for federal income tax purposes. For a more detailed discussion of the
tax consequences of the receipt of interest, see "Claims for Interest" below.
Second, creditors with Claims constituting Tax Securities who receive stock (or
other Tax Securities, such as New Senior Notes) as well as "other property"
(including cash) in a reorganization generally do not recognize loss, and
recognize gain to the extent of the lesser of (i) the fair market value of such
other property, or (ii) the actual gain realized by such creditor     
 
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<PAGE>
 
determined by comparing the value received with the adjusted tax basis of the
Tax Security exchanged. The tax basis of "other property" received in a tax-
free reorganization in exchange for a Tax Security will generally equal the
fair market value of that "other property," and the holding period of the
"other property" will begin on the day following the exchange. A Tax Security
holder's aggregate basis in the stock (and, if applicable, other Tax Security)
received in a tax-free reorganization (other than a Tax Security representing a
Claim for interest) will equal the holder's basis in the surrendered Tax
Security (other than with respect of a Claim for interest), reduced by the
amount of cash and the fair market value of "other property" received for such
Tax Security (other than a Tax Security representing a Claim for interest) and
increased by the amount of gain (if any) recognized on the exchange. The
holding period for the stock and other Tax Securities received in the exchange
(other than in respect of a Claim for interest) will include the period the
holder of the exchanged Tax Security held that Tax Security, provided the Tax
Security was held as a capital asset on the date of the exchange.
 
  Under these rules, Holders of Claims that receive New Common Shares or New
Senior Notes, or both, for their Claims may recognize gain, if any, only to the
extent of the cash they receive. They will hold the New Common Shares or New
Senior Notes, or both, with a basis computed as described above. A Tax Security
Holder who receives (i) no property other than cash, or (ii) nothing in
exchange for its Claim, will recognize gain or loss based on the amount of cash
received, if any, compared with the adjusted tax basis of its Claim.
          
  Claims for Interest. The Plan provides that consideration received in
satisfaction of a Claim will first be allocated to repayment of principal of
Claims, and any payment in excess of such principal amount will be allocated to
unpaid interest on Claim. No assurance can be given that the Internal Revenue
Service will respect this allocation. Creditors will recognize ordinary income
to the extent they receive any cash or property (including New Common Stock or
New Senior Notes) that is allocable to interest income they have not previously
included in federal taxable income. The proper allocation of amounts received
in exchange for the discharge of a Claim at a discount between principal and
interest is unclear and may be affected by, among other things, the rules in
the Internal Revenue Code relating to imputed interest, original issue discount
and accrued market discount. Creditors should consult their own tax advisors to
determine the amount of consideration received under the Prepackaged Plan
allocable to interest. In the event that the amount of cash, New Common Shares,
New Senior Notes, and other property allocable to interest on a creditor's
Claim is less than the amount previously included as interest on the Claim in
the creditor's federal taxable income, the unpaid interest may be deducted,
generally as a loss or as an adjustment to a reserve for bad debts.     
   
  Character of Gain or Loss. The character of gain or loss recognized by a
holder of a Claim as capital or ordinary, and, in the case of capital gain or
loss, as short term or long term, will depend on a number of factors,
including: (i) the nature and origin of the Claim; (ii) the tax status of the
holder of the Claim; (iii) whether the holder is a financial institution; (iv)
whether the Claim is a capital asset in the hands of the holder; (v) whether
the Claim has been held for more than one year; (vi) the extent to which the
holder previously claimed a loss, bad debt deduction or charge to a reserve for
bad debts with respect to the Claim; and (vii) in the case of a Claim arising
from certain indebtedness issued after July 18, 1984 with a term of more than
one year for which no election was made to currently include market discount in
income, whether the difference between the holder's basis in the indebtedness
immediately after it was acquired and the amount of the indebtedness exceeded
any then unaccrued original issue discount (by more than the de minimis
amount).     
   
  In the case of a creditor whose existing Claims constitute capital assets in
the creditor's hands, the gain required to be recognized will be classified as
a capital gain, except to the extent of interest (including accrued market
discount). Any gain recognized will be treated as ordinary income to the extent
of accrued (and previously unrecognized) market discount on the Outstanding
Notes. See "Market Discount" below. It should also be noted that Internal
Revenue Code section 582(c) provides that the sale or exchange of a bond,
debenture, note or certificate, or other evidence of indebtedness by a bank or
certain other financial institutions will not be considered the sale or
exchange of a capital asset. Accordingly, any gain recognized by such creditors
as a result of the implementation of the Prepackaged Plan will be ordinary
income,     
 
                                      140
<PAGE>
 
   
notwithstanding the nature of their Claims. Any capital gain recognized by a
creditor will be long-term capital gain with respect to those Claims for which
the creditor's holding period is more than one year, and short-term capital
gain with respect to such Claims for which the creditor's holding period is one
year or less. There may be a favorable differential tax rate applied to capital
gain for certain holders. Proposed legislation would index such capital gain
for the effects of inflation after December 31, 1994.     
   
  Market Discount. The Tax Reform Act of 1984 provided extensive new rules
regarding the creation, recognition and reporting of interest (including
original issue and market discount) on debt obligations. In general, the new
rules expanded the instances of discount and unstated interest, both on
original issue and subsequent disposition or acquisition of the obligation. To
the extent that a creditor has a lower tax basis in Outstanding Notes than
their face amount, the difference should constitute market discount under
section 1276 of the Internal Revenue Code. Under a de minimis exception, there
is no market discount if the difference mentioned in the previous sentence is
less than 0.25% of the face amount of the debt instrument multiplied by the
number of complete years after the acquisition date to the obligation's date of
maturity. Unless the holder elects otherwise, the accrued market discount
generally would be the amount calculated by multiplying the market discount by
a fraction, the numerator of which is the number of days the obligation has
been held by the holder and the denominator of which is the number of days
after the holder's acquisition of the obligation up to and including its
maturity date.     
 
  Holders in whose hands Claims are "market discount bonds" will be required to
treat as ordinary income any gain recognized upon the exchange of their
Outstanding Notes to the extent of the market discount accrued during the
holder's period of ownership, unless the holder has elected to include such
market discount in income as it accrued. Any additional gain recognized by the
holder would be characterized in accordance with the rules described above. Any
accrued market discount not treated as ordinary income upon an exchange of
Outstanding Notes for New Senior Notes and New Common Shares in which gain or
loss is not recognized in whole or in part should carry over into the New
Common Shares and New Senior Notes received in the exchange. The allocation of
such market discount between the New Senior Notes and New Common Shares is
unclear. On disposition of such New Senior Notes and New Common Shares, any
gain recognized generally would be treated as ordinary income to the extent of
the amount of accrued market discount carried over.
   
  Withholding. The Company will withhold any amounts required by law from
payments made to creditors. In particular, under the "backup withholding"
rules, the Company may be required to withhold cash equal to 31% of the amount
to be distributed to United States Claim holders in exchange for interest,
unless the Claim holders are eligible for certain exemptions or provide their
taxpayer identification numbers and certify that they are not subject to backup
withholding by filing a Form W-9. This may require payments by certain
creditors of the required withholding tax on the non-cash consideration
issuable under the Prepackaged Plan. Analogous withholding requirements may
apply to interest payments to foreign Claim holders. Many foreign Claim holders
holding debt instruments (as opposed, e.g., to Claims for goods or services)
may establish exemption from withholding by filing Forms W-8. In addition,
creditors may be required to provide general tax information to the Company.
    
RECAPTURE OF GAIN ON SUBSEQUENT SALE OF NEW COMMON SHARES
   
  Any gain realized on a subsequent sale of New Common Shares received in
exchange for a Claim under the Prepackaged Plan will be treated as ordinary
income to the extent of the sum of any bad debt deductions, any charges to bad
debt reserves, any ordinary loss taken on the exchange of such Claim for such
New Common Shares, or any income not recognized due to the use of the cash
method of tax accounting with respect to the Claim exchanged. The amount of
ordinary income will be reduced by the amount of income, if any, included in
the creditor's taxable income as a result of the exchange of New Common Shares
for a Claim.     
 
                                      141
<PAGE>
 
TAX TREATMENT OF HOLDERS OF OUTSTANDING COMMON SHARES
 
  Holders of Outstanding Common Shares will generally not recognize gain or
loss as a result of the reverse stock split. If Holders of Outstanding Common
Shares fail to accept the Prepackaged Plan and, as a consequence, the
Outstanding Common Shares are canceled and such holders receive nothing under
the Prepackaged Plan, such holders would recognize a loss equal to the holder's
aggregate tax basis in the Outstanding Common Shares. Any loss recognized
generally would be a capital loss and would be a long-term capital loss if the
Outstanding Common Shares were held for more than one year.
 
TAX CONSEQUENCES OF HOLDING NEW SENIOR NOTES
 
  It is not anticipated that the New Senior Notes will be publicly traded. It
is also anticipated that the New Senior Notes will bear "adequate stated
interest." In that case, the issue price of the New Senior Notes should equal
the face amount of the Notes. Payments on the New Senior Notes that do not
constitute interest will constitute principal payments that will reduce a
holder's tax basis in the New Senior Notes. Upon a sale, exchange or other
taxable disposition of New Senior Notes, a holder will recognize gain or loss
in an amount equal to the difference between the holder's amount realized and
the holder's adjusted tax basis in the New Senior Notes. Except as discussed
above under "Tax Consequences to Creditors--Market Discount," any gain or loss
recognized will be a capital gain or loss if the New Senior Notes were held as
a capital asset, and will be long-term if, at the time of disposition, the
holder's holding period was, or was deemed to be, in excess of one year. If the
New Senior Notes are determined to be publicly traded for tax purposes and the
initial trading price of the New Senior Notes is less than their stated
redemption price, the New Senior Notes will bear original issue discount.
Holders of the New Senior Notes would be required to include any original issue
discount in income on a constant interest basis.
 
TAX CONSEQUENCES OF HOLDING NEW COMMON SHARES
   
  Distributions, if any, made on the New Common Shares will be treated as
dividends to the extent of the current and accumulated earnings and profits of
the Company. See "--REIT Status and Taxation of Company Under the Prepackaged
Plan--Taxation to United States Shareholders of Distributions" for a discussion
of the treatment of such distributions. Distributions that are not treated as
dividends will first reduce a holder's tax basis in the New Common Shares and
the remainder, if any, will generally be treated as gain on a sale of the New
Common Shares. Upon a sale, exchange or other taxable disposition of New Common
Shares, a holder will recognize gain or loss in an amount equal to the
difference between the holder's amount realized and the holder's adjusted tax
basis in the New Common Shares. Except as discussed above under "Tax
Consequences to Creditors--Market Discount" and "Recapture of Gain on
Subsequent Sale of Common Shares," any gain or loss recognized will be a
capital gain or loss if the New Common Shares were held as a capital asset.
Except as discussed below under "REIT Status and Taxation of Company Under the
Prepackaged Plan--Taxation to United States Shareholders of Distributions,"
such capital gain or loss will be long-term if, at the time of disposition, the
holder's holding period was, or was deemed to be, in excess of one year.     
 
REIT STATUS AND TAXATION OF COMPANY UNDER THE PREPACKAGED PLAN
          
  General Tax Consequences. The Company will continue to elect to be taxed as a
REIT under Internal Revenue Code sections 856 through 860 and the applicable
Treasury Regulations (the "REIT Requirements" or the "REIT Provisions"), which
are the requirements for qualifying as a REIT after the Prepackaged Plan is
consummated. As long as the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on that portion
of its ordinary income or capital gain that is currently distributed to
shareholders. Such treatment substantially eliminates the federal "double
taxation" on earnings (at the corporate and the shareholder levels) that
generally results from investment in a corporation. The Company intends to
continue to operate in such a manner as to continue to qualify for taxation as
a REIT under the Internal Revenue Code, but no assurance can be given that it
will operate in a manner so as to     
 
                                      142
<PAGE>
 
qualify or remain qualified. Qualification as a REIT involves the application
of highly technical and complex Internal Revenue Code provisions for which
there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect its ability to qualify as a REIT. In addition,
no assurance can be given that legislation, new regulations, administrative
interpretations, or court decisions will not significantly change the tax laws
with respect to the qualification as a REIT or the federal income tax
consequences of such qualification; however, the Company is not aware of any
proposal in Congress to amend the tax laws that would materially and adversely
affect the Company's ability to operate as a REIT. The REIT Requirements are
highly technical and complex. The following discussion sets forth only the
material aspects of those requirements. This summary is qualified in its
entirety by the applicable Internal Revenue Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
 
  Despite the REIT election, the Company may be subject to federal income and
excise tax as follows:
 
    First, the Company will be taxed at regular corporate income tax rates on
  any undistributed REIT taxable income, including undistributed net capital
  gains.
 
    Second, under certain circumstances, the Company may be subject to the
  "alternative minimum tax" on certain of its items of tax preferences, if
  any.
 
    Third, if the Company has (i) net income from the sale or other
  disposition of "foreclosure property" that is held primarily for sale to
  customers in the ordinary course of business or (ii) other nonqualifying
  net income from foreclosure property, it will be subject to tax at the
  highest corporate rate on such income.
 
    Fourth, if the Company has net income from prohibited transactions (which
  are, in general, certain sales or other dispositions of property held
  primarily for sale to customers in the ordinary course of business, other
  than sales of foreclosure property), such income will be subject to a 100%
  tax.
 
    Fifth, if the Company should fail to satisfy the 75% gross income test or
  the 95% gross income test (as discussed below), but has nonetheless
  maintained its qualifications as a REIT because certain other requirements
  have been met, it will be subject to a 100% tax on the net income
  attributable to the greater of the amount by which the Company fails the
  75% or 95% test, multiplied by a fraction intended to reflect the Company's
  profitability.
 
    Sixth, if the Company should fail to distribute, or fail to be treated as
  having distributed, with respect to each calendar year, at least the sum of
  (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
  capital gain net income for such year, and (iii) any undistributed taxable
  income from prior periods, the Company would be subject to a 4% excise tax
  on the excess of such required distribution over the amounts actually
  distributed.
 
  The Company does not now intend to acquire any appreciated assets from a
corporation generally subject to full corporate-level tax in a transaction in
which its basis in assets would carry over from the transferor. However, in the
event of such an acquisition, the Company could, under certain circumstances,
be subject to tax upon disposition of such assets.
          
  REIT Organizational Requirements. The Internal Revenue Code defines a REIT as
a corporation, trust, or association (a) that is managed by one or more
trustees or directors; (b) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(c) that would be taxable as a domestic corporation, but for the REIT
Requirements; (d) that is neither a financial institution nor an insurance
company subject to certain provisions of the Internal Revenue Code; (e) the
beneficial ownership of which is held by 100 or more persons; (f) not more than
50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) at any time during the last half of each
taxable year and (g) meets certain     
 
                                      143
<PAGE>
 
other tests, described below, regarding the nature of its income and assets.
The Internal Revenue Code provides that conditions (a) through (d), inclusive,
must be met during the entire taxable year and that condition (e) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. For purposes of
condition (f), pension funds and certain other tax-exempt entities are
generally treated as individuals. Effective for taxable years beginning after
December 31, 1993, a pension trust that qualifies under section 401(a) of the
Internal Revenue Code generally will not be treated as an individual for these
purposes; instead the beneficiaries of the pension trust will be treated as
holding shares of the REIT in proportion to their actuarial interests in the
pension trust. The Company believes that it will issue sufficient New Common
Shares pursuant to the Prepackaged Plan to allow it to continue to satisfy
conditions (e) and (f) above. In addition, a corporation may not elect to
become a REIT unless its taxable year is the calendar year. The Company
satisfies this requirement.
          
  Income Tests. In order to maintain qualification as a REIT, the Company must
satisfy annually three gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived, directly or indirectly, from investments
relating to real property or mortgages on real property (as interest on
obligations secured by mortgages, "rents from real property" or as gain on the
sale or exchange of such property), from certain types of temporary investments
or from certain other types of gross income. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property investments as
aforesaid and from dividends, interest, and gain from the sale or other
disposition of stock or securities and certain other types of gross income (or
from any combination of the foregoing). Third, short-term gain from the sale or
other disposition of stock or securities, gain from prohibited transactions,
and gain on the sale or other disposition of real property held for less than
four years (apart from involuntary conversions and sales of foreclosure
property) generally must represent less than 30% of the Company's gross income
(including gross income from prohibited transactions) for each taxable year.
    
  Rents received or deemed to be received by the Company will qualify as "rents
from real property" in satisfying the gross income requirements for a REIT
described above only if certain conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Internal Revenue
Code provides that rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income tests if the Company, or an owner
of 10% or more of the Company, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." The Company does not anticipate deriving rent attributable to
personal property leased in connection with real property in excess of the 15%
limitation described above. Finally, for rents received to qualify as "rents
from real property," the Company generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant primarily for his convenience." While the
Company believes that the services rendered to its tenants are usually or
customarily rendered in connection with the rental of space, if challenged by
the Service, it may not be able to demonstrate that the extent to which such
services are rendered by other property owners is common enough to cause them
to be "customarily rendered." In the case of any services that are not "usual
and customary" under the foregoing rules, the Company intends to employ
independent contractors to perform such services.
          
  Relief Provisions. If the Company fails to satisfy one or both of the 75% or
95% gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain     
 
                                      144
<PAGE>
 
provisions of the Internal Revenue Code. These relief provisions will be
generally available if the Company's failure to meet such tests was due to
reasonable cause and not due to willful neglect, if the Company attaches a
schedule of the sources of its income to its return and if any incorrect
information on the schedule was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. As discussed
above, even if these relief provisions apply, a tax would be imposed with
respect to the Company's excess net income.
          
  Asset Tests. At the close of each quarter of its taxable year, the Company
must satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets, cash, cash items, and government securities. Second, not more
than 25% of the Company's total assets may be represented by securities other
than those in the 75% asset class. Third, of the investments included in the
25% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities.
    
  After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests, and to take such
action within 30 days after the close of any quarter as may be required to cure
any noncompliance.
          
  Annual REIT Distribution Requirements. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (a) the sum of (i) 95% of
the Company's "REIT taxable income" (computed without regard to the dividends
paid deduction and the Company's net capital gain) plus (ii) 95% of the net
income (after tax), if any, from foreclosure property in excess of the special
tax on income from foreclosure property, minus (b) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that the Company
does not distribute all of its net capital gain or distributes at least 95%,
but less than 100% of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (a) 85% of its REIT ordinary income for such
year, (b) 95% of its REIT capital gain net income for such year, and (c) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to make timely distributions
sufficient to satisfy the annual distribution requirement. The Company
anticipates that it will generally have sufficient cash or liquid assets to
enable it to satisfy the 95% distribution requirement. REIT taxable income is
taxable income computed under general principles, subject to the following
modifications: the corporate dividends received deductions are not allowed; the
deduction for dividends paid under Internal Revenue Code section 561 is
computed without regard to that portion of the deduction that is attributable
to the amount excluded from REIT taxable income as net income from foreclosure
property; taxable income is computed without regard to the rules under Internal
Revenue Code section 443(b) relating to computation of tax on change of annual
accounting period; an amount equal to the net income from foreclosure property
is excluded; an amount equal to the tax imposed under Internal Revenue Code
section 857(b)(5) if certain REIT requirements is deducted; and an amount equal
to any net income derived from prohibited transactions is excluded ("REIT
Taxable Income").     
 
  It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (a) the actual receipt of income and actual payment
of deductible expenses and (b) the inclusion of such income and deduction of
such
 
                                      145
<PAGE>
 
expenses in arriving at the taxable income of the Company. In the event that
such an insufficiency or such timing differences occur, the Company may find it
necessary to arrange for borrowings, or to pay dividends in the form of taxable
stock dividends, if it is practicable to do so, to meet the 95% distribution
requirement.
 
  Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
          
  Failure to Qualify As a REIT. If the Company fails to qualify for taxation as
a REIT in any taxable year, and the relief provisions described above do not
apply, the Company will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company and they will not be required to be made. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and subject
to certain limitations of the Internal Revenue Code, corporate distributees may
be eligible for the dividends-received deduction. Unless entitled to relief
under specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost, and will not be permitted to requalify unless it
distributes any earnings and profits attributable to the period when it failed
to qualify. In addition, it would be subject to tax on any built-in gains on
property held during the period during which it did not qualify if it sold such
property within 10 years of requalification. It is not possible to state
whether in all circumstances the Company would be entitled to such statutory
relief.     
          
  Taxation to United States Shareholders of Distributions. As long as the
Company qualifies as a REIT, distributions up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital gain
dividends) to a United States Shareholder (i.e., a holder of New Common Shares
that is for United States federal income tax purposes (a) a citizen or resident
of the United States, (b) a corporation, partnership, or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, or (c) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source), will be
taken into account by them as ordinary income and will not be eligible for the
dividends-received deduction for corporations. Distributions that are
designated by the Company as capital gain dividends will be treated as long-
term capital gain (to the extent they do not exceed the Company's actual net
capital gain) for the taxable year without regard to the period for which the
shareholder has held its stock. However, corporate shareholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income,
pursuant to Internal Revenue Code section 291(d). A distribution in excess of
current or accumulated earnings and profits will first be treated as a tax-free
return of capital, reducing the tax basis in the United States Shareholder's
New Common Shares, and a distribution in excess of the United States
Shareholder's tax basis in such respective New Common Shares will be taxable
gain realized from the sale of such shares. Dividends declared by the Company
in October, November or December of any year payable to a shareholder of record
on a specified date in any such month will be treated as both paid by the
Company and received by the shareholder on December 31 of such year, provided
that the dividend is actually paid by the Company during January of the
following calendar year. Shareholders may not claim the benefit of any tax
losses of the Company on their own income tax returns.     
 
  The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of the 4% excise tax discussed
above. As a result, shareholders may be required to treat as taxable dividends,
certain distributions that would otherwise result in a tax-free return of
capital. Moreover, any "deficiency dividend" will be treated as a "dividend"
(an ordinary dividend or a capital gain dividend, as the case may be),
regardless of the Company's earnings and profits.
 
                                      146
<PAGE>
 
  A loss incurred on the sale or exchange of New Common Shares held for less
than six months will be deemed a long-term capital loss to the extent of any
capital gain dividends received by the selling shareholder with respect to such
stock.
          
  Treatment of Tax-Exempt Shareholders. Distributions from the Company to a
tax-exempt employee pension trust or other domestic tax-exempt shareholder will
not constitute "unrelated business taxable income" unless the shareholder has
borrowed to acquire or carry its shares of the Company. A tax-exempt employee's
pension trust that holds more than 10% of the New Common Shares may under
certain circumstances be required to treat a certain percentage of dividends as
unrelated business taxable income if the Company is "predominantly held" by
qualified trusts. For these purposes, a qualified trust is any trust defined
under Internal Revenue Code section 401(a) and exempt from tax under Internal
Revenue Code section 501(a).     
          
  Taxation of Foreign Shareholders. The rules governing United States income
taxation of non-resident alien individuals, foreign corporations, foreign
partnerships, and foreign trusts and estates holding New Common Shares
(collectively, "Foreign Shareholders") are complex, and no attempt will be made
herein to discuss such rules. A Foreign Shareholder should consult with his or
her own tax advisor to determine the effect of federal, state, and local and
country of tax residence income tax laws on an investment in the Company,
including any reporting requirements.     
 
ADDITIONAL TAX CONSEQUENCES TO THE COMPANY FROM THE PREPACKAGED PLAN
          
  Availability of Tax Attributes. The Company's federal income tax returns
reflect significant NOLs. As discussed below, a portion of those NOLs may be
available to offset future income of the Company. The Company's tax returns for
years in which the NOLs were incurred have not been examined by the Internal
Revenue Service. Accordingly, the amount and availability of these NOLs
(including the applicability of Internal Revenue Code section 382) may be
subject to review upon audit by the Internal Revenue Service.     
          
  Internal Revenue Code Section 382 Limits on Use of Tax Attributes. Internal
Revenue Code section 382 (in conjunction with Internal Revenue Code section
383) provides rules governing the use of a corporation's NOLs and other tax
attributes following significant changes in the ownership of a corporation's
stock. Subject to the Title 11 Exception discussed below, Internal Revenue Code
section 382 provides that, following an "ownership change" of a corporation
with NOLs or a net unrealized built-in loss (a "Loss Corporation"), the amount
of the Loss Corporation's taxable income that can be offset by its NOLs and,
under certain circumstances, recognized built-in losses cannot exceed an amount
equal to the sum of (x) the product of the value of the Loss Corporation
immediately before the ownership change (increased as discussed below, in some
circumstances, by any increase in value resulting from any surrender or
cancellation of creditors' claims) multiplied by the long-term tax-exempt rate,
which is 6.83% for March, 1995 (the "Section 382 Limitation") plus (y)
recognized built-in gains (if any). Any portion of the Section 382 Limitation
not used in any taxable year can be carried forward to increase the
corporation's Section 382 Limitation in future years.     
 
  Recognized built-in gains include gains resulting from the disposition
(within 5 years after the ownership change) of assets, the fair market value of
which immediately before the ownership change is greater than the tax adjusted
basis of such assets at that time (to the extent of that excess) and income
attributable to periods before the ownership change but includible during the
5- year period after the ownership change. Recognized built-in gains increase
the Section 382 Limitation only to the extent of a corporation's net unrealized
built-in gain, i.e., generally, to the extent its potential built-in gains
exceed its potential built-in losses immediately before an ownership change.
 
  Recognized built-in losses result from the disposition (within 5 years after
the ownership change) of assets, the fair market value of which immediately
before the ownership change is less than the adjusted tax basis of such assets
at that time (to the extent of that difference) and deductions attributable to
periods before the ownership change but claimed during the 5-year period after
the ownership change. Recognized built-in
 
                                      147
<PAGE>
 
losses are subject to the Section 382 Limitation only to the extent of a
corporation's net unrealized built-in loss, i.e., generally, to the extent the
corporation's potential built-in losses exceed its potential built-in gains
immediately before an ownership change. A corporation's net unrealized built-in
loss is treated as zero unless the corporation's net unrealized built-in loss
exceeds a threshold amount and a corporation's net unrealized built-in gain is
treated as zero unless the corporation's net unrealized built-in gain exceeds a
threshold amount. After the Prepackaged Plan is effected, the Company
anticipates that it will have a net unrealized built-in loss.
   
  An "ownership change" occurs if there is an "owner shift involving a 5-
percent Shareholder" or an "equity structure shift" and because of such event,
the percentage of stock of the new Loss Corporation owned by any one or more of
"5-Percent Shareholders" (described below) is increased by more than 50
percentage points relative to the lowest percentage of stock of the old Loss
Corporation owned by those 5-Percent Shareholders at any time during the
testing period (generally a 3-year period). The determination of whether an
ownership change has occurred is made by aggregating the increases in
percentage ownership for each 5-Percent Shareholder whose percentage ownership
is increased during the testing period. For this purpose, all stock owned by
persons who own less than 5% of a corporation's stock generally is treated as
stock owned by a single 5-Percent Shareholder.     
 
  An "owner shift involving a 5-Percent Shareholder" is defined as any change
in the respective ownership of stock of a corporation that affects the
percentage of stock held by any 5-Percent Shareholder. For purposes of this
rule, all shareholders owning less than 5% of the stock are generally
aggregated and treated as one 5-Percent Shareholder.
 
  The period for measuring whether an ownership change has occurred is referred
to as the "testing period." The testing period is a 3-year period ending on the
day of an owner shift involving a 5-Percent Shareholder. Thus, a series of
unrelated sales in a 3-year period may cause an ownership change. Internal
Revenue Code section 382 shortens the testing period in two circumstances.
First, when an ownership change occurs, a new testing period cannot begin
before the day after that change. Thus, if a second ownership change occurs in
the future, changes that counted for the first ownership change do not count
again. Second, the testing period cannot begin prior to the first year from
which there is a loss carryforward, or in certain circumstances, a net
unrealized built-in loss.
 
  To the Company's knowledge, its NOLs are not currently subject to a Section
382 Limitation. The exchanges anticipated to occur pursuant to the Prepackaged
Plan will cause an ownership change with respect to the NOL carryforwards of
the Company. Unless the Title 11 exception (discussed below) to the Section 382
Limitation applies, this ownership change will result in an annual Section 382
Limitation applying to the amount of taxable income of the Company that can be
offset with pre-change losses in the year of the ownership change and in all
years thereafter. Taxable income in excess of the Section 382 Limitation and,
possibly, recognized built-in gain would be subject to current federal income
tax.
   
  Internal Revenue Code section 382 contains a special provision (the "Title 11
Exception") which provides that in a case under the jurisdiction of a
Bankruptcy Court brought under Title 11 of the United States Code (relating to
bankruptcy) (a "Title 11 Case"), the limitations of Internal Revenue Code
section 382 will not apply to any ownership change resulting from such a
proceeding if qualifying creditors and shareholders immediately before such
ownership change own, after such ownership change and as a result of being
shareholders or creditors immediately before such change, 50% of the stock of
the loss corporation (measured by vote and value). (As discussed below, the
Loss Corporation may elect not to have this exception apply.) A corporation's
shareholders are probably determined under attribution rules, including the
rule that stock owned by a corporation is deemed owned not by the corporation
but by the corporation's stockholders. Qualifying ("old and cold") creditors
generally are creditors that have held their debt for at least 18 months before
the filing of the bankruptcy case or who acquired their debt in the ordinary
course of the debtor's business and have held their beneficial interest in the
debt at all times. Treasury Regulations provide specific rules under which
persons that own less than 5% of publicly traded debt (that has been
outstanding for more than 18 months) are presumed to have held their debt for
the required 18 months.     
 
                                      148
<PAGE>
 
   
  The regulations permit loss corporations to treat all debt held by less-
than-5-percent shareholders or 5-percent entities (i.e., entities through
which a 5-percent shareholder owns an interest in the loss corporation) on the
change date as always having been held by the same beneficial owners. This
general rule does not apply if: (i) the creditor's participation in
formulating the plan of reorganization makes evident to the loss corporation
that it is not an old and cold creditor; (ii) the loss corporation has actual
knowledge that the exercise of an option by a less-than-5-percent shareholder
would turn it into a 5-percent shareholder or entity; or (iii) the creditor is
a 5-percent entity that had an ownership change in the 18-month period, and
the indebtedness represents more than 25 percent of its gross assets
(excluding cash or cash equivalents). In addition, the regulations provide
tacking rules under which a transferee creditor is treated as having held the
debt during the period it was held by the transferor, thus adding to the
category of creditors that can qualify as old and cold. The tacking rules
apply to (i) debt transferred to related parties, (ii) debt transferred under
a syndication agreement within 90 days of origination, (iii) debt transferred
by an underwriter, (iv) debt transferred with its basis determined by Internal
Revenue Code sections 1014 or 1015, or to satisfy a pecuniary bequest or
divorce settlement; (v) debt transferred pursuant to a security arrangement;
(vi) debt transferred in a debt to debt exchange with the loss corporation;
and (vii) debt transferred in a customary commercial factoring transaction
within 30 days after the account arose by a transferee that regularly engages
in those transactions. These tacking rules are not available where a abusive
principal purpose exists.     
   
  If the Title 11 Exception applies, the Company's NOL carryover and specified
credits must be computed to eliminate deductions for interest paid or accrued
by the Company on that portion of the debt that is exchanged for stock, and
for which the Company previously had claimed deductions for federal income tax
purposes during (i) the three taxable years prior to the taxable year in which
the ownership change occurs and (ii) the portion of the taxable year of the
ownership change up to, but not including, the "change date." In addition, if
the debtor undergoes a second ownership change within two years, its Section
382 Limitation after that second change would be zero.     
 
  The Company is currently considering, based on projections of future income,
whether it would be more advantageous to have the Title 11 Exception apply or
to elect to have the Title 11 Exception not apply, and whether, if it
determines that it would be advantageous to have the Title 11 Exception apply,
it is eligible for that exception. The Company has tentatively concluded that
it would be advantageous for it to elect not to have the Title 11 Exception
apply.
 
  A REIT generally may elect to use its NOLs to reduce its REIT Taxable Income
(subject to the Internal Revenue Code section 382 restrictions discussed
above) in a manner similar to that of Subchapter C corporations, subject to
the special rules discussed below. A REIT may not carryback its NOLs for use
in any taxable year preceding the taxable year in which the NOL arises. A REIT
may carryforward its NOLs up to 15 years. In computing the amount of NOL
carryover available for a REIT taxable year, available NOLs may be used to
shelter REIT Taxable Income. A REIT that distributes all of its REIT Taxable
Income before taking its NOLs into account will receive a deduction equal to
the distributed income. Unlike a regular corporation, which must use its NOLs
to reduce all of its taxable income, a REIT may elect to use only a portion of
its NOLs to reduce (but not eliminate) its REIT taxable income and
carryforward its unused NOLs. A REIT could use its NOLs, however, to reduce
its REIT taxable income and so reduce the amount of income it would be
required to distribute to its shareholders in that taxable year.
 
  REITS are also subject to a special rule regarding the computation of NOL
carryovers and capital gain dividends. A REIT is taxed on any net capital gain
that is not distributed as capital gain dividends. A shareholder or beneficial
holder treats a capital gain dividend received from a REIT as long-term
capital gain rather than ordinary income. For purposes of the net operating
loss rules, the amount of a REIT's net capital gain for the taxable year that
is paid out as capital gain dividends is excluded in determining the amount of
the REIT's NOLs that may be carried through the taxable year to succeeding
taxable years. Thus, a REIT offsets only its undistributed capital gains by
the amount of any current or carryover NOLs.
          
  Elimination of Tax Deductions Under Internal Revenue Code Section 269. In
addition to the limitations on the utilization of NOLs discussed above,
Internal Revenue Code section 269 grants the Internal Revenue     
 
                                      149
<PAGE>
 
Service authority to disallow all of a corporation's NOLs if control of a
corporation is acquired with the principal purpose to evade or avoid federal
income tax by securing the benefit of a tax deduction which the acquiring
person would not otherwise enjoy. The regulations make clear that Internal
Revenue Code section 269 can apply whether or not the NOLs are limited under
Internal Revenue Code section 382. In addition, there is a presumption that
Internal Revenue Code section 269 applies if the Title 11 Exception applies,
unless the loss corporation carries on more than an insignificant amount of an
active trade or business during and subsequent to its bankruptcy case. The
Company will continue its historic business. As a result, Internal Revenue Code
section 269 should not apply to the transactions contemplated by the
Prepackaged Plan.
          
  Cancellation of Indebtedness Income. As a result of the implementation of the
Prepackaged Plan, the amount of the Company's aggregate outstanding
indebtedness will be reduced. In general, for federal income tax purposes, a
debtor will realize COD income when a Creditor accepts less than full payment
in satisfaction of its debt. Absent an exception, the amount of COD realized
must be included in taxable income. An exception to this rule under Internal
Revenue Code section 108 provides that COD will not be included in the debtor's
taxable income where the debtor is in bankruptcy and the discharge occurs
pursuant to a plan approved by the Bankruptcy Court. Pursuant to the Internal
Revenue Code section 108 exception, unless another rule under Internal Revenue
Code section 108 applies to prevent the Company from realizing COD (e.g., where
the payment of the discharged liability would have given rise to a deduction),
the Company's tax attributes (including net operating loss carryforwards and
tax basis of its assets) will be reduced or, if the Company so elects, the
basis of the Company's depreciable property and certain property held for
resale will first be reduced to zero, and then the Company's tax attributes
will be reduced.     
 
  Under the Prepackaged Plan, the Company will realize COD and thus, will be
required to reduce its tax attributes as a result of discharging Creditor
Claims with Cash, New Senior Notes or New Common Shares. The amount of COD will
equal the excess of the adjusted issue price of the debt cancelled, if any,
over the sum of the Cash, the issue price of the New Senior Notes, and the fair
market value of the New Common Shares received in exchange therefor. If debt
was not issued with original issue discount, the adjusted issue price of the
debt is its face amount. For debt issued with original issue discount, the
adjusted issue price generally will equal the initial issue price of the debt
plus the amount of any original issue discount accrued to the time of the
exchange, less any payments on the debt other than payments of stated interest.
          
  Alternative Minimum Tax. The Tax Reform Act of 1986 imposed a comprehensive
alternative minimum tax ("AMT") on corporations. AMT liability generally equals
20% of the corporation's alternative minimum taxable income ("AMTI") and is
payable to the extent it exceeds the regular tax for the taxable year. AMTI is
determined by making certain adjustments to regular taxable income and adding
the amount of "tax preferences" described in Internal Revenue Code section 57.
Up to 90% of AMTI can be offset with NOLs (as computed for AMT purposes). Thus,
at a minimum, a 2% tax is imposed on AMTI (i.e., AMT at a 20% rate on the 10%
of AMTI that cannot be offset with NOLs). Future income of the Company that is
offset by NOLs for regular tax purposes may not be wholly offset by NOLs for
AMT purposes. These general rules are applied to REITs by adjusting REIT
taxable income for tax preferences; a REIT claiming no tax preferences would
have no AMTI, and so no AMT liability. The limits on NOL use to shelter AMTI
would therefore affect the Company only if the Company claims tax preferences.
    
  One of the significant adjustments made in determining a corporation's AMTI
is an increase based on adjusted current earnings. For any taxable year
beginning after 1989, a corporation's AMTI is increased by 75% of the amount,
if any, that the adjusted current earnings of the corporation exceeds AMTI
without taking into account the adjusted current earnings adjustment, and
without regard to the alternative tax net operating loss deduction. Internal
Revenue Code section 56(g)(4)(G) provides adjusted current earnings generally
equal alternative minimum taxable income determined with a number of specific
adjustments. Internal Revenue Code section 56(g)(4)(B)(i) provides that in
determining a corporation's adjusted current earnings, amounts excluded from
income under Internal Revenue Code section 108 are also excluded for purposes
of the AMT. Accordingly, the Company's AMT should not be affected by COD income
realized by the Company pursuant to the Prepackaged Plan, but not recognized
under Internal Revenue Code section 108.
 
                                      150
<PAGE>
 
       
                               FINANCIAL ADVISOR
   
  The Company retained Houlihan Lokey, an investment banking firm, to advise it
with respect to the Restructuring, including the appropriate terms, from the
Company's perspective, of any modifications of the Outstanding Notes pursuant
to the Restructuring. As compensation for its services as financial advisor to
the Company in connection with the Restructuring, the Company initially agreed
to pay Houlihan a fee of $75,000 per month, plus reasonable and actual out-of-
pocket expenses incurred by Houlihan Lokey in connection with the
Restructuring. In addition, if the Restructuring is consummated, Houlihan Lokey
will receive a fee equal to 0.5% of the face amount of debt restructured,
modified, converted or forgiven payable upon closing of the Restructuring. The
Company also agreed to indemnify Houlihan Lokey for certain liabilities arising
from its participation as the Company's advisor. Pursuant to a letter agreement
that memorialized certain prior verbal modifications to the terms of Houlihan
Lokey's engagement dated March 16, 1995, effective January 1, 1994, Houlihan
Lokey had reduced its Monthly Fee to $50,000 and effective June 1, 1994,
Houlihan Lokey had reduced its Monthly Fee to $10,000. Effective November 1,
1994, the Company had agreed to resume paying Houlihan Lokey a monthly fee of
$75,000, provided that the New Monthly Fees (beginning November 1, 1994, and
continuing through the closing of the Restructuring) would be fully credited
against the Completion Fee. Furthermore, Houlihan Lokey's aggregate Completion
Fee was set at $1,450,000 less the New Monthly Fees paid to, and received by,
Houlihan Lokey. Pursuant to a letter agreement dated April 7, 1995, the
Completion Fee Balance was further reduced by $112,500. The Completion Fee
Balance is payable in cash only.     
 
                               FEES AND EXPENSES
   
  Acceptance of the Prepackaged Plan is being solicited on behalf of the
Company. The expense of soliciting acceptances of the Prepackaged Plan will be
borne by the Company. The Company has not retained any dealer-manager or
similar agent in connection with the Solicitation and will not make any
payments to brokers, dealers or others soliciting acceptances of the
Restructuring. Thus, the Company does not anticipate any solicitation agent
fees in connection with the Solicitation. The Company will not pay the
information agent any separate consideration for its services. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, telephone or in person by officers and regular employees of
the Company and its affiliates, who will not receive additional compensation.
Arrangements may also be made with brokerage houses and other custodians,
nominees and fiduciaries to forward the material regarding the Prepackaged Plan
to the beneficial owners of Outstanding Notes and Outstanding Common Shares.
The Company will reimburse such forwarding agents for reasonable out-of-pocket
expenses incurred by them, but no compensation will be paid for their services.
       
  Management anticipates that the Company will be required to make cash
payments of approximately $50 million (less any amounts paid to the holder of
the Outstanding Notes between March 1, 1995 and the Petition Date) in
connection with the consummation of the Restructuring. Cash generated from
operations and approximately $60 million (less any amounts paid to the holder
of the Outstanding Notes between March 1, 1995 and the Petition Date) from cash
on hand will be used to pay expenses and fees relating to the Restructuring.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."     
   
  The expenses to be incurred in connection with the Restructuring, including
the fees and expenses of the Solicitation Agent and Houlihan Lokey as financial
advisor, and printing, filing, accounting and legal fees, will be paid by the
Company and are estimated to be approximately $1.9 million (a portion of which
may have been paid prior to the Closing). The Company intends to use a portion
of the cash on hand and funds generated from operations, to pay such amounts.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."     
 
                                      151
<PAGE>
 
                  
               ADDITIONAL INFORMATION CONCERNING THE COMPANY     
   
  This Disclosure Statement is accompanied by and incorporates by reference the
following documents of the Company: (i) pages 28-47 (the audited financial
statements) of the Annual Report on Form 10-K for the year ended September 30,
1994; and (ii) pages 2-16 (the unaudited financial statements) of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.     
 
                                      152
<PAGE>
 
                                                                         ANNEX A
 
                      IMPORTANT: A BANKRUPTCY CASE HAS NOT
                        BEEN FILED AS OF THE DATE OF THE
                              DISCLOSURE STATEMENT
   
Paul S. Aronzon (State Bar No. 88781)     
   
Anne E. Wells (State Bar No. 155975)     
MILBANK, TWEED, HADLEY & McCLOY
601 South Figueroa Street, 30th Floor
Los Angeles, California 90017
(213) 892-4000
 
Attorneys for Mortgage and Realty
Trust, a Maryland real estate
investment trust
 
                         UNITED STATES BANKRUPTCY COURT
 
                         CENTRAL DISTRICT OF CALIFORNIA
 
In re
   
                                        )
                                        ) CASE NO. LA 95-
                                        )
MORTGAGE AND REALTY TRUST, a            )
Maryland real estate investment         )
trust,                                  ) Chapter 11
                                        )
                                        )
                                        ) PLAN OF REORGANIZATION PROPOSED BY
                                        ) MORTGAGE AND REALTY TRUST
                                        )
                                        )
                                        )
                                        )
Debtor.                                 )
                                        ) (Dated            , 1995)
                                        )
                                        )
                                        ) [No Hearing Scheduled]
                                        )
                                        )
                                        )
                                        )
                                        )
                                        )
                                        )
                                        )
                                        )
                                        )
                                        )
                                        )
                                        )
Tax I.D. No. 23-1862664                 )
                                        )
                                        )     
<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>  <S>                                                                   <C>
                                 ARTICLE I
           DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
 1.1  Administrative Claim................................................    1
 1.2  Allowed Claim or Allowed Interest...................................    1
 1.3  Amended and Restated Declaration of Trust...........................    1
 1.4  Bankruptcy Code.....................................................    1
 1.5  Bankruptcy Court....................................................    1
 1.6  Bankruptcy Rules....................................................    1
 1.7  Bar Date............................................................    2
 1.8  Business Day........................................................    2
 1.9  Cash................................................................    2
 1.10 Claim...............................................................    2
 1.11 Class 2 Expense Claims..............................................    2
 1.12 Confirmation........................................................    2
 1.13 Confirmation Date...................................................    2
 1.14 Confirmation Order..................................................    2
 1.15 Creditor............................................................    2
 1.16 Debtor..............................................................    2
 1.17 Debtor in Possession................................................    2
 1.18 Disbursing Agent....................................................    2
 1.19 Disclosure Statement................................................    2
 1.20 Disputed Claim or Disputed Interest.................................    2
 1.21 Effective Date......................................................    3
 1.22 Entity..............................................................    3
 1.23 Estate..............................................................    3
 1.24 Excluded Claims.....................................................    3
 1.25 File or Filed.......................................................    3
 1.26 Final Order.........................................................    3
 1.27 Initial Cash Distribution Fund......................................    3
 1.28 Initial Cash Reserve Fund...........................................    3
 1.29 Instrument..........................................................    3
 1.30 Interest............................................................    3
 1.31 Lien................................................................    3
 1.32 New.................................................................    4
 1.34 New Collateral Documents............................................    4
 1.35 New Common Shares...................................................    4
 1.36 New Indenture Trustee...............................................    4
 1.37 New Note Indenture..................................................    4
 1.38 New Notes...........................................................    4
 1.39 New Plan Securities.................................................    4
 1.40 Other Secured Claims................................................    4
 1.41 Outstanding Collateral Agreement....................................    4
 1.42 Outstanding Common Shares...........................................    4
 1.43 Outstanding Equity Securities.......................................    4
 1.44 Outstanding Indenture Trustee.......................................    4
 1.45 Outstanding Notes...................................................    4
 1.46 Outstanding Note Indenture..........................................    4
 1.47 Outstanding Pledge Agreement........................................    4
 1.48 Outstanding Securities..............................................    5
</TABLE>    
 
                                       i
<PAGE>
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>   <S>                                                                  <C>
 1.49  Outstanding Stock Rights...........................................    5
 1.50  Petition Date......................................................    5
 1.51  Plan...............................................................    5
 1.52  Postpetition Tax Claims............................................    5
 1.53  Prior Plan.........................................................    5
 1.54  Priority Claim.....................................................    5
 1.55  Pro Rata...........................................................    5
 1.56  Registration Rights Agreement......................................    5
 1.57  Released Claims....................................................    5
 1.58  Reorganization Case................................................    5
 1.59  Reorganized Debtor.................................................    5
 1.60  Scheduled..........................................................    5
 1.61  Schedules..........................................................    5
 1.62  Senior Noteholders.................................................    5
 1.63  Shares.............................................................    6
 1.64  Unsecured Claim....................................................    6
                                 ARTICLE II
                   CLASSIFICATION OF CLAIMS AND INTERESTS
 2.1   General............................................................    6
 2.2   Classification.....................................................    7
                                ARTICLE III
                     TREATMENT OF CLAIMS AND INTERESTS
 3.1   Unclassified Claims (Administrative Claims)........................    7
 3.2   Class 1 (Priority Claims)..........................................    8
 3.3   Class 2 (Outstanding Notes)........................................    8
 3.3.1 Class 2 Expense Claims.............................................    9
 3.4   Class 3 (Other Secured Claims).....................................   10
 3.5   Class 4 (Unsecured Claims).........................................   10
 3.6   Class 5 (Outstanding Common Shares)................................   10
 3.7   Class 6 (Outstanding Stock Rights).................................   10
                                 ARTICLE IV
           TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
 4.1   Assumption.........................................................   10
 4.2   Cure Payments......................................................   11
 4.3   Rejection..........................................................   11
                                 ARTICLE V
             MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN
 5.1   Cancellation of Outstanding Securities and Related Agreements......   11
 5.2   New Plan Securities and New Indenture..............................   11
 5.3   Distribution of Property Under the Plan............................   12
 5.4   Revesting of Assets................................................   15
 5.5   Amended and Restated Declaration of Trust; Indemnification.........   16
 5.6   Management of the Reorganized Debtor...............................   16
 5.7   Objections to Claims or Interests..................................   16
</TABLE>    
 
                                       ii
<PAGE>
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>  <S>                                                                   <C>
 5.8  Discharge of Debtor and Injunction..................................   16
 5.9  No Liability for Solicitation or Participation......................   17
 5.10 Limitation of Liability.............................................   17
 5.11 Other Documents and Actions.........................................   17
 5.12 Authorized Actions..................................................   17
 5.13 Releases............................................................   18
 5.14 Retiree Benefits....................................................   18
                                 ARTICLE VI
                                CONFIRMATION
 6.1  Confirmation........................................................   18
                                ARTICLE VII
                 CONFIRMATION AND EFFECTIVE DATE CONDITIONS
 7.1  Conditions to Effective Date........................................   19
 7.2  Waiver of Conditions to the Effective Date..........................   19
                                ARTICLE VIII
                         RETENTION OF JURISDICTION
 8.1  Retention of Jurisdiction...........................................   19
                                 ARTICLE IX
                          MISCELLANEOUS PROVISIONS
 9.1  Exemption from Transfer Taxes.......................................   20
 9.2  Application of Distributions........................................   20
 9.3  Dissolution of Committees...........................................   21
 9.4  Modification of the Plan............................................   21
 9.5  Revocation of the Plan..............................................   21
 9.6  Successors and Assigns..............................................   21
 9.7  Saturday, Sunday or Legal Holiday...................................   21
 9.8  Post-Effective Date Effect of Evidences of Claims or Interests......   21
 9.9  Governing Law.......................................................   21
 9.10 Severability of Plan Provisions.....................................   22
 9.11 No Admissions.......................................................   22
</TABLE>    
 
EXHIBITS AND SCHEDULES
 
  Exhibit A - Form of New Note Indenture
 
  Exhibit B - Form of New Collateral Documents
 
  Exhibit C - Form of Registration Rights Agreement
 
  Exhibit D - Summary of Terms of Securities
 
  Exhibit E - Schedule of Assumed Contracts and Unexpired Leases
 
  Exhibit F - Schedule of Rejected Contracts and Leases
 
  Exhibit G - Amended and Restated Declaration of Trust
 
                                      iii
<PAGE>
 
                                  INTRODUCTION
 
  Mortgage and Realty Trust, a Maryland real estate investment trust (the
"Debtor"), hereby proposes the following plan of reorganization (the "Plan")
for the resolution of all claims against and equity interests in the Debtor.
Reference is made to the "Disclosure Statement and Proxy Statement -Prospectus
for the Solicitation of Votes for the Prepackaged Plan of Reorganization of
Mortgage and Realty Trust" (the "Disclosure Statement") for a discussion of the
Debtor's history, business, properties and results of operations, and for a
summary of the Plan and certain related matters.
 
  All holders of claims against and equity interests in the Debtor are
encouraged to read the Plan and the Disclosure Statement in their entirety
before voting to accept or reject the Plan. No materials, other than the
Disclosure Statement and any exhibits and schedules attached thereto or
referenced therein, have been approved by the Debtor for use in soliciting
acceptances or rejections of the Plan.
 
                                   ARTICLE I
 
             DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
   
  In addition to such other terms as are defined in other sections of the Plan,
the following terms (which appear in the Plan as capitalized terms) have the
following meanings as used in the Plan:     
   
  1.1 Administrative Claim: A Claim for costs and expenses of administration
allowed under section 503(b) of the Bankruptcy Code and referred to in section
507(a)(1) of the Bankruptcy Code, including, without limitation: (a) the actual
and necessary costs and expenses incurred after the Petition Date of preserving
the Estate and operating the business of the Debtor (such as wages, salaries or
commissions for services and payments for goods) (b) compensation for legal,
financial advisory, accounting and other services and reimbursement of expenses
allowed under section 330 of the Bankruptcy Code; and (c) all fees and charges
assessed against the Estate under 28 U.S.C. (S) 1930.     
   
  1.2 Allowed Claim or Allowed Interest: A Claim against or Interest in the
Debtor to the extent that:     
     
    (a) (i) a proof of the Claim or Interest was or is timely Filed or deemed
  timely Filed under applicable law or by reason of an order of the
  Bankruptcy Court or (ii) if no proof of Claim or Interest is filed, the
  Claim or Interest is Scheduled as liquidated, undisputed, and
  noncontingent; and     
     
    (b) (i) the Claim or Interest is not a Disputed Claim or Disputed
  Interest (but only to the extent that such Claim is not a Disputed Claim or
  Disputed Interest);     
       
      (ii) the Claim or Interest is allowed by a Final Order (but only to
    the extent allowed); or     
       
      (iii) the Claim or Interest is allowed under the Plan, but only to the
    extent allowed.     
   
  1.3 Amended and Restated Declaration of Trust: The Amended and Restated
Declaration of Trust of the Reorganized Debtor, substantially in the form of
Exhibit G.     
   
  1.4 Bankruptcy Code: Title 11 of the United States Code, as in effect on the
Petition Date or as amended, as applicable to the Reorganization Case.     
   
  1.5 Bankruptcy Court: The United States District Court having jurisdiction
over the Reorganization Case and, to the extent of any reference made pursuant
to section 157, title 28, United States Code, the unit of such District Court
constituted pursuant to section 151, title 28, United States Code.     
   
  1.6 Bankruptcy Rules: The Federal Rules of Bankruptcy Procedure, the Local
Rules of the Bankruptcy Court and the guidelines and requirements of the Office
of the United States Trustee, as applicable from time to time in the
Reorganization Case.     
 
                                      A-1
<PAGE>
 
   
  1.7 Bar Date: The date, if any, fixed by the Bankruptcy Court pursuant to
Bankruptcy Rule 3003(c)(3) as the last day for filing proofs of claim in the
Reorganization Case.     
   
  1.8 Business Day: Any day other than a Saturday, Sunday or "legal holiday"
(as defined in Bankruptcy Rule 9006(a)).     
   
  1.9 Cash: Legal tender accepted in the United States of America for the
payment of public and private debts, currently United States Dollars.     
   
  1.10 Claim: A claim against the Debtor, whether or not asserted or allowed,
as defined in section 101(5) of the Bankruptcy Code.     
   
  1.11 Class 2 Expense Claims: Any unpaid fees and reasonable unpaid out-of-
pocket costs or expenses earned or incurred through the Effective Date by the
Outstanding Indenture Trustee or the attorneys for the Senior Noteholders and
Mutual Series Fund, Inc., including, without limitation, reasonable out-of-
pocket costs and expenses and reasonable fees of legal counsel to the
Outstanding Indenture Trustee.     
   
  1.12 Confirmation: The confirmation of the Plan effected by the Confirmation
Order.     
   
  1.13 Confirmation Date: The date on which the Bankruptcy Court enters the
Confirmation Order on its docket.     
   
  1.14 Confirmation Order: The order of the Bankruptcy Court confirming the
Plan pursuant to section 1129 of the Bankruptcy Code.     
   
  1.15 Creditor: Any Entity that holds on the Effective Date a Claim against
the Debtor that arose or is deemed to have arisen before the Petition Date,
including a Claim against the Debtor of a kind specified in sections 502(g),
502(h) or 502(i) of the Bankruptcy Code.     
   
  1.16 Debtor: Mortgage and Realty Trust, a Maryland real estate investment
trust.     
   
  1.17 Debtor in Possession: The Debtor, as debtor in possession in the
Reorganization Case.     
   
  1.18 Disbursing Agent: The Reorganized Debtor or any other Entities
designated by the Reorganized Debtor pursuant to section 5.3.5 to distribute
property under the Plan.     
   
  1.19 Disclosure Statement: The Disclosure Statement and Proxy Statement For
the Solicitation of Votes For the Prepackaged Plan of Reorganization of
Mortgage and Realty Trust, dated            , 1995 (and all exhibits and
schedules annexed thereto or referred to therein) that relates to the Plan, as
it may have been amended or supplemented from time to time.     
   
  1.20 Disputed Claim or Disputed Interest: A Claim or Interest as to which a
proof of claim or interest, as applicable, (a) has been Filed or deemed Filed
under applicable law, or by reason of an order of the Bankruptcy Court, but as
to which an objection has been or may be timely Filed and which objection, if
timely Filed, has not been withdrawn on or before any date fixed for Filing
such objections by the Plan or order of the Bankruptcy Court and has not been
overruled or denied by a Final Order or (b) has not been timely Filed, if such
proof of Claim or Interest was required to be Filed. Prior to the time that an
objection has been or may be deemed timely Filed, a Claim or Interest shall be
considered a Disputed Claim or Disputed Interest, as applicable, in its
entirety if: (i) the amount of the Claim or Interest specified in the proof of
claim or interest exceeds the amount of any corresponding Claim or Interest
Scheduled by the Debtor in its Schedules or its List of Equity Security
Holders, as applicable; (ii) any corresponding Claim or Interest Scheduled by
the Debtor in its Schedules or its List of Equity Security Holders, as
applicable, has been Scheduled as disputed, contingent or unliquidated,
irrespective of the amount Scheduled; or (iii) no corresponding Claim or
Interest has been Scheduled by the Debtor in its Schedules or its List of
Equity Security Holders, as applicable.     
 
                                      A-2
<PAGE>
 
   
  1.21 Effective Date: A Business Day, selected by the Debtor, (a) that is at
least eleven (11) calendar days after the Confirmation Date or, with the
consent of the Senior Noteholders, at least one (1) Business Day after the
Confirmation Date, if the Bankruptcy Court enters an order making Bankruptcy
Rule 7062 inapplicable to the proceedings respecting the Confirmation Order or
otherwise determining that the Effective Date may occur immediately following
Confirmation; and (b) on which: (x) no stay of the Confirmation Order is in
effect and (y) all conditions to the Effective Date set forth in section 7.1
hereof have been satisfied or waived pursuant to section 7.2 hereof.     
   
  1.22 Entity: An individual, corporation, limited liability company,
partnership, association, joint stock company, joint venture, estate, trust,
unincorporated organization, government or any political subdivision thereof,
governmental unit, Creditors' Committee, unofficial committee of creditors or
equity holders or other entity.     
   
  1.23 Estate: The estate created by the commencement of the Reorganization
Case under section 541 of the Bankruptcy Code.     
   
  1.24 Excluded Claims: Any obligations that arise under the Plan or any
document, instrument or agreement to be executed, delivered or assumed under
the Plan, including, without limitation, the obligations of the Reorganized
Debtor under the New Notes, the New Note Indenture, the New Collateral
Documents, and all documents, instruments and agreements delivered or to be
delivered in connection therewith.     
   
  1.25 File or Filed: File or filed with the clerk of the Bankruptcy Court in
the Reorganization Case.     
   
  1.26 Final Order: An order or judgment of the Bankruptcy Court or other court
of competent jurisdiction as to which the time to appeal, seek leave to appeal,
petition for certiorari or move for reargument or rehearing has expired and as
to which no appeal, petition for certiorari or other proceedings for
reargument, rehearing or leave to appeal shall be pending or as to which any
right to appeal, petition for certiorari, reargue, rehear or seek leave to
appeal shall have been waived in writing in form and substance satisfactory to
the Debtor or the Reorganized Debtor or, in the event that an appeal, writ of
certiorari, or reargument or rehearing thereof or leave to appeal has been
motioned for or sought, such order of the court shall have been affirmed by the
highest court to which such order was appealed, or certiorari has been denied
or from which reargument or rehearing or leave to appeal was motioned for or
sought, and the time to take any further appeal, petition for certiorari, move
for reargument or rehearing or seek leave to appeal shall have expired.     
   
  1.27 Initial Cash Distribution Fund: Cash in an amount not less than $50
million (less any amounts paid to the holders of the Outstanding Notes between
March 1, 1995 and the Petition Date), held by the Reorganized Debtor on the
Effective Date for distribution to holders of Allowed Class 2 Claims, in excess
of monies held by the Reorganized Debtor in the Initial Cash Reserve Fund.     
   
  1.28 Initial Cash Reserve Fund: Cash in an amount not to exceed $10 million,
held by the Reorganized Debtor on the Effective Date for use by the Reorganized
Debtor in its business operations.     
   
  1.29 Instrument: Such term has the meaning set forth in Section 5.3.8(b).
       
  1.30 Interest: The interest of any equity security holder, as defined in
section 101(17) of the Bankruptcy Code, of the Debtor, whether or not asserted,
including an interest arising out of any Outstanding Stock Rights.     
   
  1.31 Lien: Any mortgage, deed of trust, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other, including a lien as
defined in section 101(37) of the Bankruptcy Code), security interest or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever, including any conditional sale or other title
retention agreement, the interest of a lessor under a capitalized lease
obligation, any financing lease having substantially the same economic effect
as any of the foregoing, and the filing, under the Uniform Commercial Code or
comparable law of any jurisdiction, of any financing statement naming the owner
of the asset to which such Lien relates as debtor.     
 
                                      A-3
<PAGE>
 
   
  1.32 New: New or amended and restated, as the case may be.     
   
  1.33 New Collateral Agent: Wilmington Trust Company and William J. Wade, as
collateral agent under the New Collateral Documents.     
   
  1.34 New Collateral Documents: The Collateral and Security Agreement dated as
of the Effective Date by and among the Reorganized Debtor and the New
Collateral Agent, including any exhibits or schedules thereto in substantially
in the form of Exhibit B, and the Mortgages, the Assignments of Leases, the
Collateral Assignments of Mortgages, the Pledge Agreement and the Collateral
Assignments of Leases (each as defined in the New Senior Note Indenture) and
all other documents, instruments and agreements delivered or to be delivered in
connection with the New Senior Note Indenture.     
   
  1.35 New Common Shares: The common shares of beneficial interest in the
Reorganized Debtor to be distributed in accordance with the provisions of the
Plan.     
   
  1.36 New Indenture Trustee: Wilmington Trust Company, as trustee under the
New Note Indenture.     
   
  1.37 New Note Indenture: The Outstanding Note Indenture, as amended and
restated, substantially in the form of Exhibit A.     
   
  1.38 New Notes: The Senior Secured Notes due 2002 of the Reorganized Debtor
dated as of the Effective Date and issued pursuant to the New Note Indenture.
       
  1.39 New Plan Securities: The New Common Shares and the New Notes to be
distributed in accordance with the provisions of the Plan.     
   
  1.40 Other Secured Claims: Any Claim, other than a Claim of a holder of
Outstanding Notes, or a Class 2 Expense Claim, of a Creditor secured by a Lien
on property of the Estate, to the extent of the value, as determined by the
Bankruptcy Court pursuant to section 506(a) of the Bankruptcy Code, of such
Creditor's interest in such property of the Estate.     
   
  1.41 Outstanding Collateral Agreement: The Collateral and Security Agreement
dated as of February 21, 1991 between, among others, the Debtor and Wilmington
Trust Company and William J. Wade, as Collateral Agents, relating to the
Outstanding Notes, as such agreement may have been amended or supplemented from
time to time prior to the Effective Date.     
   
  1.42 Outstanding Common Shares: The common shares of beneficial interests in
the Debtor, with a par value of $1.00 for each share, as authorized by the
declaration of trust of the Debtor, issued and outstanding prior to the
Effective Date.     
   
  1.43 Outstanding Equity Securities: The Outstanding Common Shares and the
Outstanding Stock Rights.     
   
  1.44 Outstanding Indenture Trustee: Wilmington Trust Company, as trustee
under the Outstanding Note Indenture, and any predecessor or successor trustee.
       
  1.45 Outstanding Notes: The outstanding Senior Secured Uncertificated Notes
due 1995 issued by the Debtor under the Outstanding Note Indenture and pursuant
to the Prior Plan.     
   
  1.46 Outstanding Note Indenture: The Indenture dated as of July 15, 1992
between the Debtor and Wilmington Trust Company, as Trustee, relating to the
Outstanding Notes, as such indenture may have been amended or supplemented from
time to time prior to the Effective Date.     
   
  1.47 Outstanding Pledge Agreement: Those certain pledge agreements executed
in connection with the Outstanding Note Indenture.     
 
                                      A-4
<PAGE>
 
   
  1.48 Outstanding Securities: The Outstanding Notes and the Outstanding Equity
Securities.     
   
  1.49 Outstanding Stock Rights: Any right to purchase or otherwise acquire
common shares of beneficial interests in the Debtor, and any stock appreciation
or similar rights relating to common shares of beneficial interests in the
Debtor, existing prior to the Effective Date. "Outstanding Stock Rights" does
not include any rights arising solely out of the ownership of the Outstanding
Common Shares.     
   
  1.50 Petition Date: The date on which the Debtor Filed its voluntary petition
for relief commencing the Reorganization Case.     
   
  1.51 Plan: This plan of reorganization, including the exhibits and schedules
hereto, either in its present form or as it may be amended, supplemented or
modified from time to time in accordance with the provisions of the Plan and
the Bankruptcy Code.     
   
  1.52 Postpetition Tax Claims: Such term shall have the meaning set forth in
section 3.1.3(d).     
   
  1.53 Prior Plan: The plan of reorganization of the Debtor confirmed by the
United States Bankruptcy Court for the Central District of California, in Case
No. LA 90-08976-SB, by order entered February 27, 1991, together with any and
all amendments to such plan of reorganization.     
   
  1.54 Priority Claim: Any Claim, other than an Administrative Claim, of a
Creditor to the extent such Claim is entitled to priority under section 507(a)
of the Bankruptcy Code.     
   
  1.55 Pro Rata: With respect to distributions under the Plan, proportionately
so that the ratio of (a) the amount of consideration distributed on account of
a particular Allowed Claim or Allowed Interest to (b) the amount of the Allowed
Claim or Allowed Interest is the same as the ratio of (w) the amount of
consideration distributed on account of all Allowed Claims or Allowed Interests
of the class in which a particular Allowed Claim or Allowed Interest is
included to (x) the amount of all Allowed Claims or Allowed Interests of that
class.     
   
  1.56 Registration Rights Agreement: The Registration Rights Agreement
relating to the New Plan Securities, substantially in the form of Exhibit C.
       
  1.57 Released Claims: Any and all actions, causes of action, claims,
liabilities, demands, and obligations of any kind or nature whatsoever that are
based upon or that arise out of any act or omission that is related to the
Reorganization Case or that are made in connection with or relate to
negotiating, formulating, implementing, confirming or consummating the Plan or
the Disclosure Statement; provided, however, that the term "Released Claims"
shall not include any Excluded Claim.     
   
  1.58 Reorganization Case: The case under chapter 11 of the Bankruptcy Code
commenced by the Debtor on the Petition Date.     
   
  1.59 Reorganized Debtor: The Debtor, or any successor thereto by merger,
consolidation or otherwise, from and after the Effective Date.     
   
  1.60 Scheduled: Set forth on the Schedules.     
   
  1.61 Schedules: The schedules of assets and liabilities filed by the Debtor
with the Bankruptcy Court in accordance with section 521 of the Bankruptcy Code
and Bankruptcy Rule 1007, as the same may be amended from time to time in
accordance with Bankruptcy Rule 1009 prior to the Effective Date.     
   
  1.62 Senior Noteholders: Fidelity Management & Research Company, Angelo
Gordon & Co., Mutual Series Fund Inc., Strome--Susskind & Co., and Emerald
Partners, as holders of Outstanding Notes, acting by a vote of 66 2/3% of the
aggregate principal amount of Outstanding Notes held by them.     
 
                                      A-5
<PAGE>
 
   
  1.63 Shares: The Outstanding Common Shares and the New Common Shares
outstanding immediately after consummation of the Plan.     
   
  1.64 Unsecured Claim: Any Claim, that is not an Administrative Claim, a
Priority Claim, a Claim under or evidenced by the Outstanding Notes, the
Outstanding Note Indenture, the Outstanding Collateral Agreement or the Prior
Plan, an Other Secured Claim, or a Claim based upon the Outstanding Common
Shares or Outstanding Stock Rights.     
   
  Rules of Interpretation: For the purposes of the Plan: (a) whenever from the
context it is appropriate, each term, whether stated in the singular or the
plural, shall include both the singular and the plural; (b) any reference in
the Plan to a contract, instrument, release or other agreement or document
being in a particular form or on particular terms and conditions means that
such document shall be substantially in such form or substantially on such
terms and conditions; provided, however, that any change to such form, terms or
conditions that are material to a party to such document shall not be modified
without such party's consent; (c) any reference in the Plan to an existing
document or Exhibit Filed or to be Filed means such document or Exhibit, as it
may have been or may be amended, modified or supplemented; (d) unless otherwise
specified in a particular reference, all references in the Plan to sections,
Articles and Exhibits are references to sections, Articles and Exhibits of or
to the Plan; (e) the words "herein," "hereof," "hereto," "hereunder" and others
of similar import refer to the Plan in its entirety rather than to only a
particular portion of the Plan; (f) captions and headings to Articles and
sections are inserted for convenience of reference only and are not intended to
be part of or to affect the interpretations of the Plan; and (g) any term used
in the Plan that is not defined in the Plan, either in this Article I or
elsewhere, but that is used in the Bankruptcy Code or the Bankruptcy Rules has
the meaning ascribed to such term in the Bankruptcy Code or the Bankruptcy
Rules, as applicable, and the rules of construction set forth in section 102 of
the Bankruptcy Code shall apply.     
   
  Time: In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.     
   
  Exhibits and Schedules: All Exhibits and Schedules to the Plan not attached
to the Plan and Disclosure Statement shall be contained in separate Exhibit
Volumes which shall be Filed not less than twenty (20) days prior to the
hearing on Confirmation. The Exhibit Volumes may be inspected in the office of
the Clerk of the Bankruptcy Court during normal Bankruptcy Court hours. On or
before the Effective Date, the Debtor shall File such agreements and other
documents as may be necessary or appropriate to effectuate and further evidence
the terms and conditions of the Plan. All Filed Exhibits are incorporated
herein by this reference and made a part hereof.     
 
                                   ARTICLE II
 
                     CLASSIFICATION OF CLAIMS AND INTERESTS
   
  2.1 General.     
 
  The following is a designation of the classes of Claims and Interests under
the Plan. In accordance with section 1123(a)(1) of the Bankruptcy Code,
Administrative Claims described in section 3.1 have not been classified and are
excluded from the following classes. A Claim or Interest is classified in a
particular class only to the extent that the Claim or Interest qualifies within
the description of that class, and is classified in another class or classes to
the extent that any remainder of the Claim or Interest qualifies within the
description of such other class or classes. A Claim or Interest is classified
in a particular class only to the extent that the Claim or Interest is an
Allowed Claim or Allowed Interest in that class and has not been paid, released
or otherwise satisfied before the Effective Date; a Claim or Interest that is
not an Allowed Claim or Allowed Interest is not in any class. Notwithstanding
anything to the contrary contained in the Plan, no distribution shall be made
on account of any Claim or Interest that is not an Allowed Claim or Allowed
Interest.
 
                                      A-6
<PAGE>
 
   
  2.2 Classification.     
   
  Claims and Interests are classified for all purposes, including voting,
confirmation and distribution pursuant to the Plan, as follows:     
 
<TABLE>   
 <C>     <S>
 CLASS 1 Priority Claims.
 CLASS 2 All Claims under or evidenced by the Outstanding Notes, the
         Outstanding Note Indenture, the Outstanding Collateral Agreement, the
         Outstanding Pledge Agreement, or any other document, instrument or
         agreement delivered in connection therewith (Impaired).
 CLASS 3 All Other Secured Claims (Impaired).
 CLASS 4 Unsecured Claims against the Debtor that are not classified in any
         other class of Claims, including, without limitation, Claims arising
         from the purchase of goods and services (Impaired).
 CLASS 5 Interests of Holders of Outstanding Common Shares (Impaired).
 CLASS 6 Interests of Holders of Outstanding Stock Rights (Impaired).
</TABLE>    
 
                                  ARTICLE III
 
                       TREATMENT OF CLAIMS AND INTERESTS
   
  3.1 Unclassified Claims (Administrative Claims).     
     
    3.1.1 GENERAL.     
 
    Subject to the bar date provisions herein, the Reorganized Debtor shall
  pay to each holder of an Administrative Claim, on account of the
  Administrative Claim and in full satisfaction thereof, Cash equal to the
  amount of such Administrative Claim, unless the holder agrees or shall have
  agreed to other less favorable treatment of such Claim. Except as otherwise
  provided herein, payment of an Administrative Claim will be made on the
  later of (a) the Effective Date or (b) the date such payment would have
  become due under the terms of such Claim in the absence of the
  Reorganization Case.
     
    3.1.2 PAYMENT OF STATUTORY FEES.     
 
    On or before the Effective Date, all fees payable pursuant to 28 U.S.C.
  1930, as determined by the Bankruptcy Court at the hearing on Confirmation,
  shall be paid in Cash equal to the amount of such Administrative Claim.
     
    3.1.3 BAR DATE FOR ADMINISTRATIVE CLAIMS.     
       
      (A) GENERAL PROVISIONS.     
 
    Except as provided below in sections 3.1.3(c) and (d), requests for
  payment of Administrative Claims must be Filed no later than sixty (60)
  days after the Effective Date. Holders of Administrative Claims (including,
  without limitation, professionals requesting compensation or reimbursement
  of expenses and the holders of any Claims for federal, state or local
  taxes) that are required to File a request for payment of such Claims and
  that do not File such requests by the applicable bar date shall be forever
  barred from asserting such Claims against the Debtor, the Reorganized
  Debtor or any of their respective properties.
       
      (B) PROFESSIONALS.     
 
    All professional or other Entities requesting compensation or
  reimbursement of expenses pursuant to sections 327, 328, 330, 503(b) and
  1103 of the Bankruptcy Code for services rendered before the Effective Date
  (including, without limitation, any compensation requested by any
  professional or any other Entity for making a substantial contribution in
  the Reorganization Case) shall File and serve on the Reorganized Debtor an
  application for final allowance of compensation and reimbursement of
  expenses no later than sixty (60) days after the Effective Date. Objections
  to applications of professionals for compensation or reimbursement of
  expenses must be Filed and served on the Reorganized Debtor and the
  professionals to whose application the objections are addressed in
  accordance with an order of the Bankruptcy Court.
 
                                      A-7
<PAGE>
 
       
      (C) ORDINARY COURSE LIABILITIES.     
 
    Holders of Administrative Claims based on liabilities incurred by the
  Debtor in Possession in the ordinary course of the Debtor's business (other
  than Claims of governmental units for taxes or Claims and/or penalties
  related to such taxes) and Claims arising under loans or advances to the
  Debtor in Possession, whether or not incurred in the ordinary course of
  business, shall not be required to File any request for payment of such
  Claims. Such Administrative Claims shall be assumed and paid by the
  Reorganized Debtor pursuant to the terms and conditions of the particular
  transaction giving rise to such Administrative Claim without any further
  action by the holders of such Claims.
       
      (D) POSTPETITION TAX CLAIMS.     
 
    All requests for payment of Administrative Claims and other Claims by a
  governmental unit for taxes (and for interest and/or penalties related to
  such taxes) for any tax year or period, all or any portion of which occurs
  or falls within the period from and including the Petition Date through and
  including the Effective Date ("Postpetition Tax Claims") and for which no
  bar date has otherwise been established prior to the Effective Date, must
  be Filed on or before the later of (i) thirty (30) days following the
  Effective Date; and (ii) 120 days following the filing of the tax return
  for such taxes for such tax year or period with the applicable governmental
  unit. Any holder of any Postpetition Tax Claim that is required to File a
  request for payment of such taxes and does not File such a request by the
  applicable bar date shall be forever barred from asserting any such
  Postpetition Tax Claim against any of the Debtor, the Reorganized Debtor or
  their respective properties, whether any such Postpetition Tax Claim is
  deemed to arise prior to, on, or subsequent to the Effective Date.
   
  3.2 Class 1 (Priority Claims):     
     
    3.2.1 SECTION 507(A)(8) PRIORITY CLAIMS.     
 
    Unless the applicable taxing agency agrees to less favorable treatment,
  the Reorganized Debtor shall pay to each holder of an Allowed Priority
  Claim entitled to priority under section 507(a)(8) of the Bankruptcy Code
  deferred Cash payments, over a period not exceeding six years from the date
  of assessment of such Claim, in an aggregate amount equal to the amount of
  such Allowed Claim, plus interest from the Effective Date on the unpaid
  portion of such Allowed Claim (without penalty of any kind) at the rate
  prescribed below. The payment of the amount of each such Allowed Priority
  Claim shall be made in equal semiannual installments commencing on the
  latest of: (i) the Effective Date, (ii) 30 calendar days after the date on
  which an Order allowing such Claim becomes a Final Order and (iii) such
  other time or times as may be agreed to by the holder of such Claim and the
  Reorganized Debtor. Each installment shall include simple interest on the
  unpaid portion of such Allowed Claim, without penalty of any kind, at the
  applicable statutory rate of interest provided for such taxes under
  applicable nonbankruptcy law; provided, however, that the Reorganized
  Debtor shall have the right to pay any Claim entitled to priority under
  section 507(a)(8) of the Bankruptcy Code, or any remaining balance of such
  Claim, in full, at any time on or after the Effective Date, without premium
  or penalty of any kind.
     
    3.2.2 OTHER PRIORITY CLAIMS.     
 
    Except as otherwise provided in the Plan and subject to compliance with
  the terms of the Plan, to the extent not previously paid, each holder of an
  Allowed Priority Claim entitled to priority under sections 507(a)(3),
  507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code shall be paid the
  full amount of its Allowed Priority Claim in Cash on the Effective Date (or
  as soon as practicable after the date on which any such Claim is allowed if
  the date of allowance is later than the Effective Date).
   
  3.3 Class 2 (Outstanding Notes).     
 
  The Class 2 Claims are impaired under the Plan. The Class 2 Claims (other
than Class 2 Expense Claims) shall be Allowed Claims (whether or not a proof of
Claim is Filed) in an amount estimated not to exceed $355,000,000.
 
                                      A-8
<PAGE>
 
   
  On the Effective Date, each holder of an Allowed Class 2 Claim (other than
the Class 2 Expense Claims, which shall be treated as described in section
3.3.1) shall receive its Pro Rata share of:     
     
    (a) Cash in the Initial Cash Distribution Fund; plus     
     
    (b) New Notes in the principal amount of $110 million; plus     
     
    (c) 10,889,180 New Common Shares which shall represent 97% in the
  aggregate of the Shares, (or New Common Shares which shall represent 99.5%
  of the Shares if the holders of Class 5 Interests do not vote to accept the
  Plan in accordance with section 1126(d) of the Bankruptcy Code, with .5% of
  the New Common Shares to be distributed to charities designated by the
  Senior Noteholders).     
 
  On the Effective Date or as soon thereafter as is practicable, the
Reorganized Debtor and each holder of an Allowed Class 2 Claim receiving in
excess of 5% of the New Common Shares or the New Notes shall be entitled to
enter into the Registration Rights Agreement relating to the New Plan
Securities.
     
    3.3.1 CLASS 2 EXPENSE CLAIMS.     
     
    The Reorganized Debtor shall pay to the applicable party entitled to
  payment an amount equal to the amount of the Class 2 Expense Claims.
  Payment of such Class 2 Expense Claims shall constitute distributions on
  account of the Allowed Claims in Class 2, in addition to the distributions
  provided for such class in section 3.3; and distributions otherwise
  provided under the Plan to holders of Allowed Class 2 Claims under section
  3.3 shall not be reduced on account of such payment of Class 2 Expense
  Claims. Notwithstanding anything in this section 3.3.1 to the contrary, the
  Reorganized Debtor's obligation to pay the Class 2 Expense Claims shall be
  subject to the same bar date and procedural provisions set forth in section
  3.1.3(a), and the procedures regarding resolution of contested Claims and
  Interests set forth in section 5.7, and, pursuant to Section 1129(a)(4) of
  the Bankruptcy Code, are subject to the approval of the Bankruptcy Court as
  reasonable.     
     
    3.3.2 GENERAL DESCRIPTION OF NEW PLAN SECURITIES DISTRIBUTABLE TO HOLDERS
  OF CLASS 2 ALLOWED CLAIMS.     
     
    The securities to be issued and distributed to holders of Allowed Class 2
  Claims under the Plan include the following:     
       
      (A) NEW NOTES.     
     
    The terms and conditions of the New Notes shall be as provided in the
  form of New Notes and the New Note Indenture. By way of summary, the New
  Notes (i) shall be issued by the Reorganized Debtor in denominations of
  $1,000 (or integral multiples thereof) in an aggregate principal amount not
  to exceed $110 million; (ii) shall be dated as of the Effective Date and
  mature on the seventh (7th) anniversary of the Effective Date; (iii) shall
  be guaranteed by each of the subsidiaries of the Debtor; and (iv) shall be
  secured under the New Note Indenture and the New Collateral Documents by
  Liens on substantially all of the assets of the Reorganized Debtor.
  Interest on the New Notes shall accrue from the Effective Date at a per
  annum rate of 11-1/8%. Interest on the New Notes shall be payable in Cash
  semiannually in arrears on June 30 and December 31, commencing after the
  Effective Date of the Plan.     
       
      (B) NEW COMMON SHARES.     
     
    Under the Plan, the Reorganized Debtor shall issue up to 10,889,180
  million New Common Shares to holders of Allowed Class 2 Claims (subject to
  rounding to account for fractional shares, as described in section 5.3.3).
  The New Common Shares shall represent shares of beneficial interest in the
  Reorganized Debtor and the terms and conditions of the New Common Shares
  shall be as provided in the Amended and Restated Declaration of Trust, and
  as provided by applicable law. Each New Common Share shall have a par value
  of $1.00. Certain matters relating to voting rights of holders of New
  Common Shares are described in section 5.5.     
 
                                      A-9
<PAGE>
 
   
  3.4 Class 3 (Other Secured Claims).     
 
  The Class 3 Claims are impaired under the Plan. To the extent not previously
paid, all Allowed Class 3 Claims will be (at the option of the Reorganized
Debtor with the consent of the Senior Noteholders): (a) paid in full, in Cash
on the Effective Date (or as soon as practicable after the date on which any
such Claim is allowed if the date of allowance is later than the Effective
Date); (b) paid upon such other less favorable terms as may be mutually agreed
upon by the Reorganized Debtor and the holder of such Claim; or (c) reinstated
and paid or performed by the Reorganized Debtor in accordance with section 1124
of the Bankruptcy Code, or the legal, equitable and contractual rights to which
such Claim entitles the holder of such Claim shall be left unaltered.
   
  3.5 Class 4 (Unsecured Claims).     
 
  The Class 4 Claims are impaired under the Plan. Each holder of a Class 4
Claim shall receive on the Effective Date, or as soon thereafter as the Claim
becomes an Allowed Claim, whichever is later, Cash equal to the amount of such
Allowed Class 4 Claim unless the holder of such Claim agrees to a less
favorable treatment.
   
  3.6 Class 5 (Outstanding Common Shares).     
 
  The Class 5 Interests are impaired under the Plan. If holders of Allowed
Class 5 Interests vote to accept the Plan in accordance with section 1126(d) of
the Bankruptcy Code, then each holder of an Allowed Class 5 Interest shall
retain its existing Outstanding Common Shares, subject to a reverse stock split
and the issuance of New Common Shares to holders of Allowed Class 2 Claims,
after which holders of Allowed Class 5 Interests will hold shares representing
3% in the aggregate of the Shares. If holders of Class 5 Interests do not vote
to accept the Plan in accordance with section 1126(d) of the Bankruptcy Code,
no distributions shall be made under the Plan on account of Interests of
holders of Outstanding Common Shares by the Debtor or from property of the
Debtor, and all Interests in Class 5 and the Outstanding Common Shares shall be
cancelled and extinguished.
   
  3.7 Class 6 (Outstanding Stock Rights).     
 
  The Class 6 Interests are impaired under the Plan. The Outstanding Stock
Rights will be canceled and no distributions shall be made to holders of
Outstanding Stock Rights under the Plan. Each of the holders of an Interest in
Class 6 shall receive or retain no property under the Plan on account of such
Interest.
 
                                   ARTICLE IV
 
             TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
   
  4.1 Assumption.     
 
  Unless previously assumed or rejected by order of the Bankruptcy Court
pursuant to section 365 of the Bankruptcy Code, as of the Effective Date, the
Reorganized Debtor shall assume, pursuant to section 365 of the Bankruptcy
Code, each of the executory contracts and leases of the Debtor that are not
rejected under section 4.3 including the executory contracts and leases that
are identified in Exhibit E. The Debtor reserves the right at any time prior to
the hearing on Confirmation, with the consent of the Senior Noteholders, to
amend Exhibit E either to: (a) delete any executory contract or lease listed
therein and provide for its rejection pursuant to section 4.3 hereof or (b) add
any executory contract or lease to Exhibit E, thus providing for its assumption
(or assumption and assignment) pursuant to this section 4.1. The Debtor shall
provide notice of any amendment to Exhibit E to the parties to the executory
contract or lease affected thereby. The Confirmation Order shall constitute an
order of the Bankruptcy Court approving all such assumptions described in this
section 4.1, pursuant to section 365 of the Bankruptcy Code, as of the
Effective Date.
 
                                      A-10
<PAGE>
 
   
  4.2 Cure Payments.     
 
  Any monetary defaults under each executory contract and lease to be assumed
under the Plan shall be satisfied, pursuant to section 365(b)(1) of the
Bankruptcy Code in either of the following ways: (1) by payment of the default
amount in Cash on the Effective Date; or (2) by payment of the default amount
on such other terms as agreed to by the Reorganized Debtor and the non-Debtor
parties to such executory contract or lease. In the event of a dispute
regarding (i) the amount or timing of any cure payments, (ii) the ability of
the Reorganized Debtor to provide adequate assurance of future performance
under the contract or lease to be assumed or (iii) any other matter pertaining
to assumption (or assumption and assignment) of the contract or lease to be
assumed, the cure payments required by section 365(b)(1) of the Bankruptcy Code
shall be made following the entry of a Final Order resolving the dispute and
approving assumption.
   
  4.3 Rejection.     
 
  Unless previously assumed or rejected by order of the Bankruptcy Court
pursuant to section 365 of the Bankruptcy Code, on the Effective Date, all
documents, agreements, contracts and leases listed on Exhibit F shall be
rejected, to the extent, if any, that any of the foregoing constitute executory
contracts or unexpired leases, and without conceding or admitting that they
constitute executory contracts or unexpired leases or that the Debtor has any
liability thereunder. The Debtor reserves the right at any time prior to the
hearing on Confirmation, with the consent of the Senior Noteholders, to amend
Exhibit F either to: (a) delete any contract or lease listed therein and
provide for its assumption pursuant to section 4.1 or (b) add any contract or
lease to Exhibit F, thus providing for its rejection pursuant to this section
4.3. The Debtor shall provide notice of any amendment of Exhibit F to the
parties to the contract or lease affected thereby.
 
  The Confirmation Order shall constitute an Order of the Bankruptcy Court
approving all such rejections pursuant to section 365 of the Bankruptcy Code as
of the Effective Date. Any Claim for damages arising from the rejection under
the Plan of an executory contract or unexpired lease must be Filed within
thirty (30) days after the mailing of notice of the entry of the Confirmation
Order or be forever barred and unenforceable against the Debtor, its Estate,
the Reorganized Debtor and its properties and barred from receiving any
distribution under the Plan on account of such Claim.
 
                                   ARTICLE V
 
               MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN
   
  5.1 Cancellation of Outstanding Securities and Related Agreements.     
 
  Except as expressly provided in the Plan or in the Confirmation Order, on the
Effective Date, the Outstanding Securities, the Outstanding Note Indenture, the
Outstanding Collateral Agreement, the Outstanding Pledge Agreement, the Prior
Plan, the Outstanding Stock Rights and all obligations of the Debtor under any
of the foregoing, shall be terminated and canceled.
   
  5.2 New Plan Securities and New Indenture.     
 
  On or before the Effective Date, the Reorganized Debtor, the New Indenture
Trustee, and the New Collateral Agent shall have executed the New Note
Indenture and the New Collateral Documents, as applicable. On the Effective
Date or as soon as practicable thereafter, the Reorganized Debtor and each
holder of Allowed Class 2 Claims receiving 5% or more of the New Common Shares
or the New Notes shall be entitled to execute and deliver the Registration
Rights Agreement. All of the documents described in this paragraph shall become
effective and binding on the Reorganized Debtor on and as of the Effective
Date. On and after the Effective Date, the Reorganized Debtor shall issue the
New Plan Securities in accordance with this Article V.
 
                                      A-11
<PAGE>
 
   
  5.3 Distribution of Property Under the Plan.     
     
    5.3.1 DISTRIBUTION DATE.     
 
    Subject to the provisions of this section 5.3, and except as otherwise
  provided herein, property to be distributed to an impaired class (a) shall
  be distributed on or as soon as practicable after the Effective Date to
  each holder of an Allowed Claim or an Allowed Interest of that class that
  is an Allowed Claim or Allowed Interest as of the Effective Date, and (b)
  shall be distributed to each holder of an Allowed Claim or an Allowed
  Interest of that class that is allowed after the Effective Date, to the
  extent allowed, as soon as practicable after such Claim or Interest becomes
  an Allowed Claim or Allowed Interest. Property to be distributed under the
  Plan to a class that is not impaired or on account of a Claim of a kind
  described in Bankruptcy Code section 507(a)(1) or Class 2 Expense Claims
  shall be distributed on the latest of (i) the later of the two dates
  specified in the preceding sentence and (ii) the date on which the
  distribution to the holder of the Allowed Claim would have been due and
  payable under the terms of the Allowed Claim in the absence of the
  Reorganization Case.
     
    5.3.2 HOLDERS OF OUTSTANDING SECURITIES ENTITLED TO RECEIVE
  DISTRIBUTIONS.     
 
    Any distribution under the Plan on account of an Allowed Claim under or
  evidenced by Outstanding Notes shall be made to the holders of record of
  such Outstanding Notes as of the Effective Date. At the close of business
  on the Effective Date, the transfer ledgers for the Outstanding Notes shall
  be closed, and there shall be no further changes in the record holders of
  the Outstanding Notes. The Debtor, the Reorganized Debtor, the Outstanding
  Indenture Trustee shall have no obligation to recognize any transfer of the
  Outstanding Notes occurring on or after the Effective Date. The Debtor, the
  Reorganized Debtor, and the Outstanding Indenture Trustee shall be entitled
  instead to recognize and deal for all purposes hereunder with only those
  record holders stated on the transfer ledgers for the Outstanding Notes, as
  of the close of business on the Effective Date.
     
    5.3.3 FRACTIONAL INTERESTS.     
 
    The calculation of the percentage distribution of New Plan Securities to
  be made to holders of certain Allowed Claims as provided elsewhere in the
  Plan may mathematically entitle the holder of such an Allowed Claim to a
  fractional interest in one or more of such New Plan Securities.
  Notwithstanding such entitlement, New Notes to be issued under the Plan
  shall be issued and distributed only in denominations of $1,000 and
  integral multiples thereof, and only whole New Common Shares shall be
  issued and distributed. For purposes of applying the following two
  paragraphs, the holders of Allowed Claims under or evidenced by Outstanding
  Notes shall, in the case of Outstanding Notes held in street name, mean the
  beneficial holders thereof as of the Effective Date.
       
      (A) NEW NOTES.     
 
    All New Notes that would have been distributed under the Plan in
  denominations of less than $1,000 but for the preceding paragraph, shall be
  aggregated into New Notes having denominations of $1,000 or integral
  multiples thereof. On the Effective Date or as soon thereafter as is
  practicable, the Disbursing Agent shall sell for Cash such aggregated New
  Notes in such manner and over such period of time as the Disbursing Agent
  considers appropriate to reasonably assure the maximization of the sale
  value of such New Notes. Upon the completion of such sales, the Disbursing
  Agent shall distribute the net proceeds thereof to the holders of the
  respective Allowed Claims ratably, in direct proportion to their respective
  interests in the New Notes to be sold. Notwithstanding the foregoing
  provisions of this section 5.3.3, if the aggregation (in accordance with
  this section 5.3.3) of New Notes results in a principal amount that is not
  $1,000 or an integral multiple thereof, such principal amount shall be
  rounded up to the next such integral multiple of $1,000 of New Notes and
  the principal amount of such New Notes so rounded up shall be sold by the
  Disbursing Agent as provided in this section 5.3.3.
 
                                      A-12
<PAGE>
 
       
      (B) NEW COMMON SHARES.     
 
    The number of New Common Shares to be received by a holder of an Allowed
  Claim shall be rounded to the next greater or lower integer of shares as
  follows: (a) fractions of 1/2 or greater shall be rounded to the next
  greater whole number and (b) fractions of less than 1/2 shall be rounded to
  the next lower integer. The total number of New Common Shares to be
  distributed to a class of Claims shall be adjusted as necessary to account
  for the rounding provided for in this section 5.3.3(b). No consideration
  shall be paid in lieu of fractional shares that are rounded down.
     
    5.3.4 PRO RATA DISTRIBUTION.     
 
    Except as otherwise provided herein, the property to be distributed to
  Class 2 under the Plan shall be divided Pro Rata among the holders of
  Allowed Claims of such class. Solely for the purpose of applying the
  definition of "Pro Rata" to the distributions within such class, the amount
  of the Allowed Claims in Class 2 shall be determined as of the Effective
  Date, based on outstanding principal amounts of the Outstanding Notes,
  without including any accrued and unpaid interest and shall exclude the
  Class 2 Expense Claims.
     
    5.3.5 DISBURSING AGENT.     
 
    The Reorganized Debtor, or such other Entity or Entities as the
  Reorganized Debtor may employ, subject to the reasonable consent of the
  Senior Noteholders, shall act as Disbursing Agents under the Plan and make
  all distributions required under the Plan. Any Disbursing Agent may employ
  or contract with other Entities to assist in or perform the distribution of
  property under the Plan. Unless otherwise determined by the Reorganized
  Debtor, each Disbursing Agent shall serve without bond. Each third party
  Disbursing Agent shall receive, without further Bankruptcy Court approval,
  reasonable compensation for distribution services rendered pursuant to the
  Plan and reimbursement of reasonable out-of-pocket expenses incurred in
  connection with such services from the Reorganized Debtor on terms agreed
  to with the Reorganized Debtor.
     
    5.3.6 DISPUTED CLAIMS OR INTEREST.     
 
    Notwithstanding any other provisions of the Plan, no payments or
  distributions shall be made on account of any Disputed Claim or Interest
  until such Claim or Interest becomes an Allowed Claim or Interest, and then
  only to the extent that it becomes an Allowed Claim or Interest.
     
    5.3.7 MANNER OF PAYMENT UNDER THE PLAN.     
 
    Cash payments made pursuant to the Plan shall be in U.S. dollars by
  checks drawn on a domestic bank selected by the Reorganized Debtor, or by
  wire transfer from a domestic bank, at the Reorganized Debtor's option,
  except that payments made to foreign trade creditors holding Allowed Claims
  may be paid, at the option of the Reorganized Debtor in such funds and by
  such means as are necessary or customary in a particular foreign
  jurisdiction. Distributions of Cash pursuant to section 3.3.1.(a) shall be
  made by mail as set forth above or, upon request of a holder of an Allowed
  Class 2 Claim, by wire transfer in accordance with written instructions
  received therefrom.
 
    5.3.8 SURRENDER OF INSTRUMENTS.
       
      (A) REQUIREMENTS TO SURRENDER OR DELIVER INSTRUMENTS OR DOCUMENTS.
        
    As a condition to the receipt of any distribution under the Plan: (i) a
  holder of an Outstanding Note shall deliver to the Outstanding Indenture
  Trustee or its designee such transaction instructions or other documents of
  transfer or exchange as the Outstanding Indenture Trustee shall request;
  and (ii) a holder of a document or instrument of the Debtor other than an
  Outstanding Note shall surrender the document or instrument to the
  Disbursing Agent or its designee. However, holders of the Outstanding
 
                                      A-13
<PAGE>
 
  Common Shares are not required to surrender such document or instrument.
  Prior to the Effective Date, each holder of a document or instrument will
  receive specific instructions regarding the time and manner in which the
  document or instrument is to be surrendered or delivered. Immediately upon
  the Effective Date and until such surrender or delivery, such document or
  instrument will be deemed canceled and represent only the right to receive
  the distributions to which the holder is entitled under the Plan.
       
      (B) LOST, STOLEN, MUTILATED OR DESTROYED INSTRUMENTS.     
 
    Any bond, debenture, share of stock, other security or note, whether or
  not a security (collectively "Instruments"), or transaction instruction,
  that is lost, stolen, mutilated or destroyed shall be deemed surrendered
  when the holder of a Claim or Interest based thereon delivers to the
  Outstanding Indenture Trustee, or Disbursing Agent or their respective
  designee, (i) evidence satisfactory to the Outstanding Indenture Trustee,
  Disbursing Agent or designee of the loss, theft, mutilation or destruction
  of such Instrument or (ii) such security or indemnity as may be required by
  the Outstanding Indenture Trustee, Disbursing Agent or designee to save
  each of them harmless with respect thereto.
       
      (C) EFFECT OF FAILURE TO SURRENDER OR DELIVER INSTRUMENTS OR
    DOCUMENTS.     
 
    Any holder of an Instrument of the Debtor that fails to surrender or
  deliver or be deemed to have surrendered or delivered the Instrument or
  relevant transaction instruction or other document within two years after
  the Effective Date shall be forever barred from receiving any distribution
  under the Plan. In such cases, any property held for distribution on
  account of a Claim or Interest based on such Instrument shall become
  property of the Reorganized Debtor in the manner provided in section
  5.3.10(b)(2) for unclaimed distributions. To the extent that any such
  property is held by a Disbursing Agent other than the Reorganized Debtor,
  such Disbursing Agent shall return such property to the Reorganized Debtor.
     
    5.3.9 DELIVERY OF DISTRIBUTIONS AND UNDELIVERABLE OR UNCLAIMED
  DISTRIBUTIONS.     
       
      (A) DELIVERY OF DISTRIBUTIONS IN GENERAL.     
 
    Except as provided below in this section 5.3.9 for undeliverable
  distributions, distributions to holders of Allowed Claims and Allowed
  Interests shall be distributed by mail as follows: (a) except in the case
  of the holder of an Instrument for which there is an indenture trustee or
  stock transfer agent, (1) to the addresses set forth on the respective
  proof of claim or interest filed by such holders; (2) to the addresses set
  forth in any written notices of address changes delivered to the Disbursing
  Agent(s) after the date of any related proof of claim or interest; or (3)
  to the address reflected on the Schedules if no proof of claim or interest
  is Filed and the Disbursing Agent(s) have not received a written notice of
  a change of address; and (b) in the case of the holder of an Instrument for
  which there is an indenture trustee or stock transfer agent, to the latest
  mailing address maintained of record by the pertinent indenture trustee,
  security registrar or stock transfer agent, or, if no mailing address is
  maintained of record, to the pertinent indenture trustee, security
  registrar or stock transfer agent.
       
      (B) UNDELIVERABLE DISTRIBUTIONS.     
         
        (1) HOLDING AND INVESTMENT OF UNDELIVERABLE PROPERTY.     
 
    If the distribution to the holder of a Claim or Interest is returned to a
  Disbursing Agent as undeliverable, no further distribution shall be made to
  such holder unless and until the Reorganized Debtor or the applicable
  Disbursing Agent is notified in writing of such holder's then current
  address. Subject to section 5.3.9(b)(2), undeliverable distributions shall
  remain in the possession of the applicable Disbursing Agent pursuant to
  this section 5.3.9 until such times as a distribution becomes deliverable.
 
    Unclaimed Cash (including interest, dividends and other consideration, if
  any, distributed on or received for undeliverable New Plan Securities)
  shall be held in trust in a segregated bank account in the name of the
  applicable Disbursing Agent for the benefit of the potential claimants of
  such funds, and
 
                                      A-14
<PAGE>
 
  shall be accounted for separately. Such funds shall be held in interest-
  bearing accounts to the extent practicable, and the parties entitled to
  such funds shall be entitled to any interest earned on such funds.
  Undeliverable New Plan Securities shall be held in trust for the benefit of
  the potential claimants of such securities by the applicable Disbursing
  Agent in principal amount of notes and in number of shares sufficient to
  fund the unclaimed amounts of such securities, and shall be accounted for
  separately.
         
        (2) DISTRIBUTION OF UNDELIVERABLE PROPERTY AFTER IT BECOMES
      DELIVERABLE AND FAILURE TO CLAIM UNDELIVERABLE PROPERTY.     
 
    Within thirty (30) days after the end of each calendar quarter following
  the Effective Date, the applicable Disbursing Agents shall make
  distributions of property that has become deliverable during the preceding
  quarter. Each such distribution shall include any dividends, interest
  payments or other distributions made on account of the distributed
  property.
 
    Any holder of an Allowed Claim or Allowed Interest who does not assert a
  claim for an undeliverable distribution held by a Disbursing Agent within
  one (1) year after the Effective Date shall no longer have any claim to or
  interest in such undeliverable distribution, and shall be forever barred
  from receiving any distributions under the Plan. In such cases any property
  held for distribution on account of such Allowed Claims or Allowed
  Interests shall be returned to and/or retained by the Reorganized Debtor,
  as follows: (1) any Cash shall be the property of the Reorganized Debtor,
  free from any restrictions thereon; (2) any New Notes shall be canceled;
  and (3) any New Common Shares reserved for issuance shall be held by the
  Reorganized Debtor as unrestricted treasury shares. Nothing contained in
  the Plan shall require the Debtor, the Reorganized Debtor or any Disbursing
  Agent to attempt to locate any holder of an Allowed Claim or an Allowed
  Interest.
     
    5.3.10 COMPLIANCE WITH TAX REQUIREMENTS.     
 
    In connection with the Plan, to the extent applicable, each Disbursing
  Agent shall comply with all withholding and reporting requirements imposed
  on it by any governmental unit, and all distributions pursuant to the Plan
  shall be subject to such withholding and reporting requirements.
     
    5.3.11 SETOFFS.     
 
    The Reorganized Debtor may, but shall not be required to, setoff against
  any Allowed Claim and the distributions to be made pursuant to the Plan on
  account of such Allowed Claim, claims of any nature that the Debtor or the
  Reorganized Debtor may have against the holder of such Allowed Claim;
  provided, however, that neither the failure to effect such a setoff nor the
  allowance of any Claim against the Debtor or the Reorganized Debtor shall
  constitute a waiver or release by the Debtor or the Reorganized Debtor of
  any claim that the Debtor or the Reorganized Debtor may possess against
  such holder.
   
  5.4 Revesting of Assets.     
 
  Except as otherwise provided in any provision of the Plan, on the Effective
Date, all property of the Estate of the Debtor shall revest in the Reorganized
Debtor, free and clear of all Claims, liens, encumbrances and other interests
of holders of Claims and Interests. From and after the Effective Date, the
Reorganized Debtor may operate its business and use, acquire and dispose of
property and settle and compromise Claims or Interests without supervision by
the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or
Bankruptcy Rules, other than those restrictions expressly imposed by the Plan,
the Confirmation Order, the New Note Indenture and the New Collateral
Documents, and any document, agreement or instrument delivered in connection
therewith.
 
                                      A-15
<PAGE>
 
   
  5.5 Amended and Restated Declaration of Trust; Indemnification.     
 
  On the Effective Date, the Reorganized Debtor shall adopt the Amended and
Restated Declaration of Trust pursuant to section 8-501 of title 8 of the
Corporations and Associations Law article of the Annotated Code of Maryland and
section 1123(a)(5)(I) and (b)(5) of the Bankruptcy Code. The Amended and
Restated Declaration of Trust will, inter alia: (i) authorize the issuance of
the New Common Shares; (ii) continue to prohibit the issuance of nonvoting
equity securities to the extent required by section 1123(a)(6) of the
Bankruptcy Code. Pursuant to the Amended and Restated Declaration of Trust and
other relevant agreements, and notwithstanding any other term or provision of
the Plan to the contrary, the Reorganized Debtor shall indemnify and hold
harmless its current and former officers, trustees and employees to the fullest
extent permitted by applicable law with respect to any such officer's,
trustee's or employee's acts, conduct and omissions whether arising before or
after the Petition Date; and (iii) impose certain transfer restrictions. Upon
(i) Confirmation of the Plan, (ii) the occurrence of the Effective Date and
(iii) the filing with the Maryland Secretary of State of the Amended and
Restated Declaration of Trust, the Amended and Restated Declaration of Trust
will become effective.
   
  5.6 Management of the Reorganized Debtor.     
     
    5.6.1 OFFICERS AND TRUSTEES.     
 
    The initial Board of Trustees of the Reorganized Debtor shall consist of
  seven members, including (a) the Chief Executive Officer of the Reorganized
  Debtor, (b) one member designated by Mutual Series Fund, Inc., and (c) five
  members designated by the Senior Noteholders. The members of the initial
  Board of Trustees shall be identified at or prior to the hearing on
  Confirmation of the Plan. Such persons shall be deemed elected to the Board
  of Trustees, and such elections shall be deemed effective as of the
  Effective Date, without any requirement of further action by shareholders
  or trustees of the Debtor or the Reorganized Debtor. The persons identified
  as such in the Disclosure Statement will serve as the initial officers of
  the Reorganized Debtor as of the Effective Date. Subject to any requirement
  of Bankruptcy Court approval under section 1129(a)(5) of the Bankruptcy
  Code, those persons designated as trustees and officers of the Reorganized
  Debtor shall assume their offices as of the Effective Date and shall
  continue to serve in such capacities thereafter, pending further action of
  the Board of Trustees or shareholders of the Reorganized Debtor in
  accordance with the Amended and Restated Declaration of Trust and
  applicable state law.
   
  5.7 Objections to Claims or Interests.     
 
  Except as otherwise provided, applications of professionals for compensation
and reimbursement of expenses under section 3.1.3(b), and except as otherwise
ordered by the Bankruptcy Court after notice and a hearing, objections to
Claims or Interests, including Administrative Claims, or to requests for
payment of Class 2 Expense Claims, shall be Filed and served upon the holder of
such Claim, Interest or Administrative Claim, the Outstanding Indenture
Trustee, or other relevant party as applicable, not later than the later of (a)
ninety (90) days after the Effective Date, and (b) ninety (90) days after a
proof of claim or interest or request for payment of such Claim, Interest,
Administrative Claim or Class 2 Expense Claims is timely Filed, unless this
period is extended by the Bankruptcy Court. After the Effective Date, the
Reorganized Debtor shall have the exclusive right to object to Claims,
Interests or Class 2 Expense Claims.
   
  5.8 Discharge of Debtor and Injunction.     
 
  Except as otherwise provided in this Plan, the rights afforded in the Plan
and the treatment of all Claims and Interests herein shall be in exchange for
and in complete satisfaction, discharge and release of all Claims and Interests
of any nature whatsoever, including any interest accrued on such Claims from
and after the Petition Date, against the Debtor and the Debtor in Possession,
or any of their assets or properties. Except as otherwise provided in the Plan
or the Confirmation Order: (i) on the Effective Date, the Debtor shall be
deemed discharged and released to the fullest extent permitted by section 1141
of the Bankruptcy Code from all Claims and Interests, including, but not
limited to, demands, liabilities, Claims and Interests that arose
 
                                      A-16
<PAGE>
 
before the Confirmation Date and all debts of the kind specified in sections
502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not: (a) a proof of
claim or proof of interest based on such debt or Interest is Filed or deemed
Filed pursuant to section 501 of the Bankruptcy Code, (b) a Claim or Interest
based on such debt or Interest is allowed pursuant to section 502 of the
Bankruptcy Code or (c) the holder of a Claim or Interest based on such debt or
Interest has accepted the Plan; and (ii) all Entities shall be precluded from
asserting against the Reorganized Debtor, its successors or its assets or
properties any other or further Claims or Interests based upon any act or
omission, transaction or other activity of any kind or nature that occurred
prior to the Confirmation Date. Except as otherwise provided in the Plan or the
Confirmation Order, the Confirmation Order shall act as a discharge of any and
all Claims against and all debts and liabilities of the Debtor, as provided in
sections 524 and 1141 of the Bankruptcy Code, and such discharge shall void any
judgment against the Debtor at any time obtained to the extent that it relates
to a Claim discharged.
 
  Except as otherwise provided in the Plan or the Confirmation Order, on and
after the Effective Date, all Entities who have held, currently hold or may
hold a debt, Claim or Interest discharged pursuant to the terms of the Plan are
permanently enjoined from taking any of the following actions on account of any
such discharged debt, Claim or Interest: (1) commencing or continuing in any
manner any action or other proceeding against the Debtor, the Reorganized
Debtor, their successors or their respective property; (2) enforcing,
attaching, collecting or recovering in any manner any judgment, award, decree
or order against the Debtor, the Reorganized Debtor, their successors or their
respective property; (3) creating, perfecting or enforcing any lien or
encumbrance against the Debtor, the Reorganized Debtor, their successors or
their respective property; (4) asserting any setoff, right of subrogation or
recoupment of any kind against any obligation due to the Debtor, the
Reorganized Debtor, their successors or their respective property; and (5)
commencing or continuing any action, in any manner, in any place that does not
comply with or is inconsistent with the provisions of the Plan or the
Confirmation Order. Any Entity injured by any willful violation of such
injunction shall recover actual damages, including costs and attorneys' fees,
and, in appropriate circumstances, may recover punitive damages, from the
willful violator.
   
  5.9 No Liability for Solicitation or Participation.     
 
  As specified in section 1125(e) of the Bankruptcy Code, Entities that solicit
acceptances or rejections of the Plan and/or that participate in the offer,
issuance, sale or purchase of securities offered or sold under the Plan, in
good faith and in compliance with the applicable provisions of the Bankruptcy
Code, are not liable, on account of such solicitation or participation, for
violation of any applicable law, rule or regulation governing the solicitation
of acceptances or rejections of the Plan or the offer, issuance, sale or
purchase of securities.
   
  5.10 Limitation of Liability.     
 
  Neither the Debtor, the Debtor in Possession, the Reorganized Debtor, the
Senior Noteholders, the creditors' committee under the Prior Plan, nor any of
their employees, officers, trustees, members, agents or representatives, nor
any professional Entities employed by any of them shall have or incur any
liability to any Entity for any act taken or omission made in good faith in
connection with or related to formulating, implementing, confirming or
consummating the Plan, the Disclosure Statement or any contract, instrument,
release or other agreement or document created in connection with the Plan.
   
  5.11 Other Documents and Actions.     
 
  The Debtor, the Debtor in Possession and the Reorganized Debtor may execute
such documents and take such other action as is necessary to effectuate the
transactions provided for in the Plan.
   
  5.12 Authorized Actions.     
 
  The issuance of New Common Shares and New Notes, the adoption of the Amended
and Restated Declaration of Trust, the selection of the persons who will serve
as the initial trustees and officers of the Reorganized Debtor as of the
Effective Date, the execution of the New Note Indenture, the New Collateral
 
                                      A-17
<PAGE>
 
Documents, the adoption of the other matters under the Plan involving the
corporate structure of the Debtor or the Reorganized Debtor or corporate action
by the Debtor or the Reorganized Debtor shall be deemed to have occurred and be
effective on and after the Effective Date without any requirement of further
action by shareholders or trustees of the Debtor or the Reorganized Debtor.
Without limiting the foregoing, upon entry of the Confirmation Order by the
clerk of the Bankruptcy Court, the filing by the Debtor or the Reorganized
Debtor of the Amended and Restated Declaration of Trust shall be authorized and
approved in all respects. On the Effective Date or as soon thereafter as is
practicable, pursuant to applicable state law, the Reorganized Debtor shall
file with the applicable state governmental agencies or offices the Amended and
Restated Declaration of Trust.
   
  5.13 Releases.     
 
  In consideration for the distributions to be made under the Plan and the
releases provided for herein, and in order to protect the Reorganized Debtor
from Claims for contribution or indemnity relating to pre-Effective Date acts
or omissions, as of the Effective Date: (i) the creditors' committee formed
under the Prior Plan, each holder of a Claim or Interest, and each of the
officers, directors, employees, members and professionals of such committee or
holder, shall be released from any Released Claims that the Debtor may have
against any of them (the "Debtor Release"); (ii) the Debtor, the Reorganized
Debtor, the creditors' committee under the Prior Plan, the Senior Noteholders,
and their respective officers, directors, employees, members and professionals
(collectively, the "Debtor Releasees") shall be released from any Released
Claims that any holder of a Claim or Interest may have against any of the
Debtor Releasees; and (iii) the Debtor Releasees also shall be released from
any and all actions, causes of action, claims, liabilities, demands and
obligations of any kind or nature whatsoever that the Debtor, the Reorganized
Debtor, the Debtor's Estate or any holder of a Claim or Interest may have
against any of the Debtor Releasees that is based upon or that arises out of
any alleged act or omission by any of the Debtor Releasees that is related to
the Debtor, including, without limitation, the Reorganization Case, the
Outstanding Notes, the Outstanding Collateral Agreement, the Prior Plan, the
Outstanding Common Shares, the Outstanding Stock Rights or any of the Claims or
Interests in the Reorganization Case, provided, however, that this release
shall not apply to Excluded Claims against the Debtor (the release described in
subparagraphs (ii) and (iii) is hereinafter referred to as the
"Creditor/Shareholder Release") and no holder of a Claim shall be released
until such Claim is allowed. Notwithstanding the foregoing, to the extent that
a holder of a Claim or Interest elects not to grant a Creditor/Shareholder
Release and receive a Debtor Release, such holder may make such election by
indicating its election to opt out of such releases in the space provided for
such election on the ballot for accepting or rejecting the Plan. If a holder
makes such election, the Creditor/Shareholder Release shall not be enforceable
against such holder, and such holder shall not be released under the Debtor
Release.
   
  5.14 Retiree Benefits.     
 
  On and after the Effective Date, to the extent required by section
1129(a)(13) of the Bankruptcy Code, the Reorganized Debtor shall continue to
pay all retiree benefits (if any), as the term "retiree benefits" is defined in
section 1114(a) of the Bankruptcy Code, maintained or established by the Debtor
prior to the Confirmation Date.
 
                                   ARTICLE VI
 
                                  CONFIRMATION
   
  6.1 Confirmation.     
 
  The Debtor requests Confirmation of the Plan under section 1129(a) and
section 1129(b) of the Bankruptcy Code if any impaired class does not accept
the Plan pursuant to section 1126 of the Bankruptcy Code, subject to the
consent of the Senior Noteholders. The Debtor reserves the right to modify the
Plan, subject to the consent of the Senior Noteholders, to the extent, if any,
that Confirmation of the Plan under section 1129(b) of the Bankruptcy Code
requires modification.
 
                                      A-18
<PAGE>
 
                                  ARTICLE VII
 
                   CONFIRMATION AND EFFECTIVE DATE CONDITIONS
   
  7.1 Conditions to Effective Date.     
   
  The Plan shall not be consummated and the Effective Date shall not occur
unless and until each of the following conditions has been satisfied or duly
waived as specified below:     
     
    7.1.1 The Plan has been accepted by the requisite holders of Claims in
  Class 2 pursuant to section 1126 of the Bankruptcy Code;     
     
    7.1.2 The Clerk of the Bankruptcy Court has entered the Confirmation
  Order, in form and substance satisfactory to the Debtor and to the Senior
  Noteholders and unless otherwise agreed to by the Senior Noteholders, such
  order shall have become a Final Order;     
     
    7.1.3 No court shall have entered an order modifying or staying the
  enforcement of the Confirmation Order or any such stay shall have been
  vacated;     
     
    7.1.4 The New Note Indenture shall have been qualified under the Trust
  Indenture Act of 1939, as amended, and no stop order shall have been issued
  with respect thereto; and     
     
    7.1.5 The New Note Indenture and the New Collateral Documents shall have
  been executed and delivered by the Reorganized Debtor and each of its
  subsidiaries, and the New Indenture Trustee.     
     
    7.1.6 All other material documents, instruments or agreements including,
  without limitation, the Amended and Restated Declaration of Trust shall
  have been executed and delivered by the parties thereto and become
  effective.     
   
  7.2 Waiver of Conditions to the Effective Date.     
 
  The Debtor, with the consent of the Senior Noteholders, may waive any of the
conditions to the Effective Date.
 
                                  ARTICLE VIII
 
                           RETENTION OF JURISDICTION
   
  8.1 Retention of Jurisdiction.     
   
  Notwithstanding the entry of the Confirmation Order or the occurrence of the
Effective Date, the Bankruptcy Court shall retain such jurisdiction over the
Reorganization Case after the Effective Date as is legally permissible,
including, without limitation, jurisdiction to:     
     
    8.1.1 Allow, disallow, determine, liquidate, classify or establish the
  priority or secured or unsecured status of or estimate any Claim or
  Interest, including, without limitation, the resolution of any request for
  payment of any Administrative Claim or Class 2 Expense Claim and the
  resolution of any and all objections to the allowance or priority of Claims
  or Interests;     
     
    8.1.2 Grant or deny any and all applications for allowance of
  compensation or reimbursement of expenses authorized pursuant to the
  Bankruptcy Code or the Plan, for periods ending on or before the Effective
  Date;     
     
    8.1.3 Resolve any motions pending on the Effective Date to assume, assume
  and assign or reject any executory contract or unexpired lease to which the
  Debtor is a party or with respect to which the Debtor may be liable and to
  hear, determine and, if necessary, liquidate, any and all Claims arising
  therefrom;     
 
                                      A-19
<PAGE>
 
     
    8.1.4 Ensure that distributions to holders of Allowed Claims and Allowed
  Interests are accomplished pursuant to the provisions of the Plan;     
     
    8.1.5 Decide or resolve any and all applications, motions, adversary
  proceedings, contested or litigated matters and any other matters or grant
  or deny any applications involving the Debtor that may be pending on the
  Effective Date;     
     
    8.1.6 Enter such orders as may be necessary or appropriate to implement
  or consummate the provisions of the Plan and all contracts, instruments,
  releases and other agreements or documents created in connection with the
  Plan or the Disclosure Statement;     
     
    8.1.7 Resolve any and all controversies, suits or issues that may arise
  in connection with consummation of the Plan;     
     
    8.1.8 Modify the Plan before or after the Effective Date pursuant to
  section 1127 of the Bankruptcy Code, or to modify the Disclosure Statement
  or any contract, instrument, release or other agreement or document created
  in connection with the Plan or the Disclosure Statement in accordance with
  section 1127 of the Bankruptcy Code; or remedy any defect or omission or
  reconcile any inconsistency in any Bankruptcy Court order, the Plan, the
  Disclosure Statement or any contract, instrument, release or other
  agreement or document created in connection with the Plan or the Disclosure
  Statement, in such manner as may be necessary or appropriate to consummate
  the Plan, to the extent authorized by the Bankruptcy Code;     
     
    8.1.9 Issue injunctions, enter and implement other orders or take such
  other actions as may be necessary or appropriate to restrain interference
  by any entity with consummation or enforcement of the Plan;     
     
    8.1.10 Enter and implement such orders as are necessary or appropriate if
  the Confirmation Order is for any reason modified, stayed, reversed,
  revoked or vacated; and     
     
    8.1.11 Enter an Order on a Final decree closing the Reorganization Case.
      
  If the Bankruptcy Court abstains from exercising jurisdiction or is otherwise
without jurisdiction over any matter arising out of the Reorganization Case,
including without limitation the matters set forth in this Article VIII, this
Article VIII shall have no effect upon and shall not control, prohibit or limit
the exercise of jurisdiction by any other court having competent jurisdiction
with respect to such matter.
 
                                   ARTICLE IX
 
                            MISCELLANEOUS PROVISIONS
   
  9.1 Exemption from Transfer Taxes.     
 
  Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer or
exchange of notes or equity securities under the Plan, the creation of any
mortgage, deed of trust or other security interest or collateral assignment of
mortgage, deed of trust or other security interest, the making or assignment of
any lease or sublease, the amendment of any of the foregoing that may exist
prior to the date hereof, or the making or delivery of any deed or other
instrument of transfer under, in furtherance of, or in connection with the Plan
or in connection with any of the transactions contemplated under the Plan shall
not be subject to any stamp, real estate transfer, mortgage recording or other
similar tax.
   
  9.2 Application of Distributions.     
 
  If the distributions of property and interests in property hereunder on
account of any Allowed Claim are less than the aggregate amount of principal
and accrued but unpaid interest payable under the agreement governing,
instrument evidencing or other document relating to such Allowed Claim, such
distributions shall be applied first to principal and then to accrued but
unpaid interest.
 
                                      A-20
<PAGE>
 
   
  9.3 Dissolution of Committees.     
 
  On the Effective Date, any statutory committees of Creditors or Interest
holders shall dissolve and the members of such committees shall be released and
discharged from all further rights and duties arising from or related to the
Reorganization Case. The professionals retained by any such committee and the
members thereof shall not be entitled to compensation or reimbursement of
expenses for any services rendered after the Effective Date, except for
services rendered and expenses incurred in connection with any applications for
allowance of compensation and reimbursement of expenses pending on the
Effective Date or Filed after the Effective Date pursuant to section 3.1.
   
  9.4 Modification of the Plan.     
 
  Subject to the restrictions on modifications to the Plan set forth in section
1127 of the Bankruptcy Code, the Debtor, subject to the approval of the Senior
Noteholders, reserves the right to alter, amend or modify the Plan before its
substantial consummation.
   
  9.5 Revocation of the Plan.     
 
  The Debtor reserves the right to revoke or withdraw the Plan prior to the
Confirmation Date, with the consent of the Senior Noteholders. If the Debtor
revokes or withdraws the Plan, or if Confirmation does not occur or if the Plan
does not become effective, then the Plan shall be null and void, and nothing
contained in the Plan shall: (1) constitute a waiver or release of any Claims
by or against, or any interests in, the Debtor; (2) constitute an admission of
any fact or legal conclusion by the Debtor, the Debtor in Possession or any
other Entity; or (3) prejudice in any manner the rights of the Debtor, the
Debtor in Possession or any other Entity in any further proceedings involving
the Debtor, the Debtor in Possession, or any other Entity.
   
  9.6 Successors and Assigns.     
 
  The rights, benefits and obligations of any Entity named or referred to in
the Plan shall be binding on, and shall inure to the benefit of, any heir,
executor, administrator, successor or assign of such Entity.
   
  9.7 Saturday, Sunday or Legal Holiday.     
 
  If any payment or act under the Plan is required to be made or performed on a
date that is not a Business Day, then the making of such payment or the
performance of such act may be completed on the next succeeding Business Day,
but shall be deemed to have been completed as of the required date.
   
  9.8 Post-Effective Date Effect of Evidences of Claims or Interests.     
 
  Except as otherwise expressly provided in the Plan, notes, bonds, stock
certificates and other evidences of Claims against or Interests in the Debtor
shall, effective upon the Effective Date, represent only the right to
participate in the distributions contemplated by the Plan.
   
  9.9 Governing Law.     
 
  Unless a rule of law or procedure is supplied by (i) federal law (including
the Bankruptcy Code and Bankruptcy Rules), (ii) an express choice of law
provision in any agreement, contract, instrument or document provided for, or
executed in connection with, the Plan, or (iii) the Corporations and
Associations Law article of the Annotated Code of Maryland, the rights and
obligations arising under the Plan and any agreements, contracts, documents and
instruments executed in connection with the Plan shall be governed by, and
construed and enforced in accordance with, the laws of the State of California
without giving effect to the principles of conflict of laws thereof.
 
                                      A-21
<PAGE>
 
   
  9.10 Severability of Plan Provisions.     
 
  If prior to Confirmation any term or provision of the Plan that does not
govern the treatment of Claims or Interests or the conditions to the Effective
Date is held by the Bankruptcy Court to be invalid, void or unenforceable, the
Bankruptcy Court shall have the power, subject to the consent of the Senior
Noteholders, to alter and interpret such term or provision to make it valid or
enforceable to the maximum extent practicable, consistent with the original
purpose of the term or provision held to be invalid, void or unenforceable, and
such term or provision shall then be applicable as altered or interpreted.
Notwithstanding any such holding, alteration or interpretation, the remainder
of the terms and provisions of the Plan will remain in full force and effect
and will in no way be affected, impaired or invalidated by such holding,
alteration or interpretation. The Confirmation Order shall constitute a
judicial determination and shall provide that each term and provision of the
Plan, as it may have been altered or interpreted in accordance with the
foregoing, is valid and enforceable pursuant to its terms.
   
  9.11 No Admissions.     
 
  Notwithstanding anything herein to the contrary, nothing contained in the
Plan shall be deemed as an admission by the Debtor with respect to any matter
set forth herein including, without limitation, liability on any Claim or the
propriety of any Claims classification.
 
Dated:           , 1995
 
                                          Respectfully submitted,
 
                                          MORTGAGE AND REALTY TRUST
 
                                          By: _________________________________
                                            C.W. Strong, Jr., President
 
 
                                      A-22
<PAGE>
 
                                                                         ANNEX C
 
                 [Paste-Up Logo of Kenneth Leventhal & Company]
 
Mortgage and Realty Trust
Elkins Park, Pennsylvania
 
  This report sets forth a summary of the work performed by Kenneth Leventhal &
Company ("KL") at the request of Mr. C. W. Strong, Jr., President, Mortgage and
Realty Trust ("MRT"). The work performed included the procedures outlined in
our engagement letter dated April 12, 1995 (Exhibit A). It is our understanding
that the work performed by KL as summarized herein will be utilized by MRT in
connection with a judicial restructuring of MRT. Accordingly, this report is
intended solely for your use in connection with such judicial restructuring
transaction and is not to be otherwise used, circulated, quoted or referred to
in any manner. In addition, our letter of April 12, 1995 contains specific
limitations with respect to the analytical procedures performed in connection
with this engagement and is incorporated in its entirety by reference herein.
 
ENGAGEMENT APPROACH
 
  We obtained selected financial information prepared by MRT as of March 31,
1995. Utilizing this information, we selected 26 assets representing mortgage
loans, investments, in substance foreclosure assets, and real estate equities
owned. The selection was divided between the "West Coast" and "East Coast"
portfolios and generally represented the assets with the highest dollar values
in the portfolio. In addition, as summarized in Exhibit B to this report, the
selection of assets included different portfolio classifications.
 
  For the assets selected as outlined above, the following procedures were
performed:
 
  .  We obtained the most recent "Argus" property cash flow projections.
 
  .  We obtained, where applicable, the most recent operating rent roll and
     other financial information.
 
  .  We obtained the most recent appraisals, where applicable and available.
 
  .  We obtained the previous KL analytical procedures performed as of March
     1993 and July 1994.
 
  .  We discussed the current status of each selected asset with the
     respective MRT asset manager to determine loan status, property
     characteristics, current occupancy, existing market rental rates, new
     leases, current payoff discussions, asset sales, etc.
 
  .  We reviewed limited market information including selected submarket
     information, if available.
 
  .  We modified the MRT assumptions, as necessary, to conform to certain
     known current market conditions and our understanding of the assets.
 
  .  We updated the valuation model prepared by KL in 1993 and 1994 utilizing
     current market and/or assumption modifications determined from the
     procedures outlined above. The valuation model utilizes a monthly
     discounting methodology whereby NOI and capital expenses are discounted
     on a monthly basis. This monthly methodology approximates a "mid-year"
     discounting convention.
 
  .  We calculated estimated asset values on a going concern basis (as
     defined below).
 
  We believe that the procedures outlined above, when applied to 26 of the
largest assets in the MRT portfolio, provide a sufficient mathematical basis
for extrapolation of the values to the remaining portfolio in order to
calculate a range of valuation on a going concern basis as defined below.
 
                                      C-1
<PAGE>
 
  The results of our procedures as outlined above are summarized in Exhibit B.
 
  You have requested that we determine the valuation of the portfolio on a
going concern basis. The assumptions utilized by MRT and reviewed by us
included expected collection of amounts due on mortgage loans and cash flows
from operating properties. To determine a going concern valuation, the
assumptions are predicated on the orderly collection and selected disposal of
assets over a period of several years. The going concern valuation is not
reflective of values which would result from a distressed sale, forced
liquidation or disposition of the portfolio in a bulk sale or any other
accelerated manner.
 
  In addition to the specific portfolio valuation procedures outlined above,
you further requested that we approximate a range of valuation for the total
enterprise as of March 31, 1995. Such enterprise valuation is presented in
Exhibit C. The enterprise valuation as of March 31, 1995 utilizes the most
recently available financial statements of MRT and adjusts for the portfolio
analyses as determined above, and other modifications as summarized in the
notes to Exhibit C included herein.
 
                                          Kenneth Leventhal & Company
 
May 15, 1995
 
                                      C-2
<PAGE>
 
 
- --------------------------------------------------------------------------------
 
                              SUMMARY OF EXHIBITS
 
- --------------------------------------------------------------------------------
 
A. Engagement Letter dated April 12, 1995
 
B. Book Balance and Valuation for Selected Assets and Extrapolated Values
 
C. Range of Enterprise Going Concern Value
 
 
 
                 [Paste-Up Logo of Kenneth Leventhal & Company]
 
                                      C-3
<PAGE>
 
                                                              EXHIBIT A (1 OF 3)
 
                       [Kenneth Leventhal & Company Logo]
 
 
April 12, 1995
 
Mr. C.W. Strong, Jr.
President
Mortgage and Realty Trust
3500 West Olive Avenue
Suite 600
Burbank, CA 91505-4628
 
Dear Mr. Strong:
 
  In accordance with your request, this letter sets forth our understanding and
agreement with respect to the work Kenneth Leventhal & Company will perform in
connection with the valuation of Mortgage and Realty Trust's investment
portfolio, including mortgage loans, property acquired through foreclosure and
held for sale, in-substance foreclosures, participating loans, amortizing
loans, realty equities, real estate equities and investments in partnerships.
Our work is being performed to update our previous work to assist MRT and its
various interested creditor parties in determining an appropriate basis of
valuation for a potential restructuring transaction. This letter summarizes the
scope of services we will provide, project approach, engagement staffing,
timing and estimated fees.
 
BACKGROUND AND OUR UNDERSTANDING
 
  Kenneth Leventhal & Company ("KL") is familiar with the Mortgage and Realty
Trust ("MRT") portfolio as a result of a comprehensive due diligence project
undertaken in early 1993 on behalf of a potential equity investor and
individual asset valuations and an "Entity" valuation as of June 30, 1994
undertaken for MRT. At the time of the 1993 engagement, KL performed
comprehensive due diligence of all assets in the MRT portfolio. The asset
valuations as of June 30, 1994, updated the valuations for 26 of MRT's assets.
 
  It is our understanding that MRT desires assistance in determining valuations
for the MRT portfolio (as described above) for the purposes of considering
various restructuring alternatives. MRT, through its various financial advisors
and in connection with its ongoing discussions with various creditor groups,
has performed comprehensive analyses of their investment portfolio and certain
other interim valuations have been performed by other outside consultants. It
is contemplated that all previous data and information relative to the
portfolio maintained by MRT will be made available to KL to assist them in
performing the presently requested services.
 
  The valuation consulting services applied to the MRT portfolio as of June 30,
1994 will be updated to March 31, 1995. The valuation services to be provided
will not constitute independent asset appraisals performed in accordance with
standards established by the Appraisal Institute or other professional bodies.
The procedures will be designed to determine an estimated range of value of the
MRT portfolio on a going-concern basis, that is, on a basis that does not
contemplate an accelerated liquidation, bulk sale of assets or other form of
distressed sale. The procedures will also be designed to present a range of
liquidation values for the MRT portfolio to approximate the amount that may be
realized upon a current market accelerated liquidation.
 
 
                                      C-4
<PAGE>
 
                                                              EXHIBIT A (2 OF 3)
ENGAGEMENT APPROACH
 
  In consideration of the previous work performed by KL, this engagement will
be designed to utilize all existing information to the fullest extent possible.
The procedures of this engagement will be designed to update the June 30, 1994
values as of March 31, 1995 and will be substantially similar to those
performed for the valuation as of June 30, 1994. This work will be conducted on
the 26 assets previously valued. Any of those 26 assets which have been
disposed of will be replaced by assets with the highest book value that were
not previously tested.
 
  In summary, the procedures to be performed in connection with the 26 assets
will include the following.
 
  .  Obtain the most recent "Argus" property cashflow projections.
 
  .  Obtain the most recent operating rent rolls and other financial
     information.
 
  .  Obtain the most recent appraisals, where available.
 
  .  Obtain the previous KL portfolio analyses from March 1993 and June 30,
     1994.
 
  .  Discuss the current status with the asset manager to determine loan
     status, foreclosure property characteristics, including current
     occupancy, existing market rental rates, new leases, current payoff
     discussions, asset sales, etc.
 
  .  Review and update market information for the properties, including
     selected submarket information, if available.
 
  .  Modify MRT assumptions, as necessary, to conform to current updated
     market conditions.
 
  .  Update the valuation model prepared by KL in 1993 utilizing current
     market and/or assumption modifications determined from the procedures
     provided above.
 
  .  Calculate estimated range of asset values on both a going-concern and
     liquidation value basis.
 
  We believe that the procedures outlined above, applied to 26 of the largest
assets in the MRT portfolio, will provide a sufficient mathematical basis for
extrapolation of characteristics to the remaining portfolio and, therefore,
provide an acceptable basis for the calculation of appropriate valuation ranges
on both the going-concern and liquidation basis.
 
 
  In addition to the specific valuation procedures outlined above, KL is
prepared to assist both MRT and its creditor groups with further refinements to
the valuation and other assistance which may be required in connection with the
potential restructuring alternatives presently considered.
 
ENGAGEMENT STAFFING
 
  In light of the accelerated timetable mandated for this engagement, the
project will be undertaken by KL personnel on the east coast and west coast
simultaneously. Stephen G. Finn will serve as the overall engagement partner,
assisted by Mr. Frederick Chin, the Director of KL's valuation practice in Los
Angeles. Both Mr. Chin and Mr. Finn will be assisted by staff from KL's various
offices.
 
  It is anticipated that the procedures outlined above will require
approximately 30 to 45 business days to complete and, therefore, a date of May
31, 1995 is the projected completion date.
 
ESTIMATED FEES
 
  It is anticipated that the procedures outlined above will utilize, to a
significant extent, data prepared by KL and MRT in connection with the previous
portfolio analyses. Our work will also encompass a review of the portfolio
updated valuation procedures performed by MRT to provide a basis for us to
conclude the appropriateness of extrapolating the valuation characteristics of
the 26 assets selected to the entire portfolio. The estimated fees to perform
updated valuations of the 26 selected assets will be $2,000 per asset plus
applicable out-of-pocket expenses. The total estimated fees for this update,
exclusive of any professional services requested to comply with Bankruptcy or
SEC reporting requirements, will be $50,000--$60,000.
 
                                      C-5
<PAGE>
 
                                                              EXHIBIT A (3 OF 3)
 
  As noted above, the engagement is being approached so as to permit
modification or expansion of procedures to the entire portfolio, if considered
necessary by MRT and its advisors. To the extent an expansion of procedures is
considered necessary or additional tasks are required, supplemental letters of
understanding will be prepared with appropriate estimates of fees and tasks
described herein.
 
  It is understood that the work outlined herein is being performed at the
request of MRT for their use in connection with discussions with various
interested creditor groups. It is further understood that certain portions of
KL's work product may be made available to MRT for use in their bankruptcy/SEC
proxy filing. As the engagement progresses, KL will make periodic status
reports to MRT. It is understood that the work undertaken by KL is of a
confidential nature and will not be utilized by KL or communicated to any other
parties without the express, written authorization from MRT.
 
  In addition to the valuation services outlined above, KL is available to
assist MRT with implementation issues associated with "Fresh Start" accounting
(FAS-SOP-90-7). This assistance may include allocation methodology for asset
valuations or the determination of the "Fresh Start" Balance Sheet. Our charges
for this additional assistance will be made at our standard billing rates, with
a budget estimate, per task approved by you in advance.
 
  As noted above, KL may be called upon to present additional information,
reports, consents, testimony, meetings and consultations in connection with the
restructuring process currently under way. The charges outlined above to update
our valuation do not attempt to estimate such restructuring process costs. To
the extent services are requested outside the scope of the work contemplated
above, we will 1) notify you and 2) bill such time at our normal standard rates
of $80--$350 per hour.
 
  Either party may terminate this letter agreement at any time upon written
notice, without liability or continuing obligation, except that neither the
termination nor completion of this assignment shall affect: (a) any
compensation earned by KL up to the date of termination or completion, as the
case may be, or (b) the reimbursement of expenses incurred by KL up to the date
of termination or completion, as the case may be.
 
  We appreciate the opportunity to be of continued service to Mortgage and
Realty Trust and look forward to beginning this work immediately.
 
                                          Very truly yours,
                                             
                                          /s/ Stephen G. Finn     
                                          -------------------------------------
                                             
                                          Stephen G. Finn     
                                             
                                          of Kenneth Leventhal & Company     
 
SGF/ld
 
cc: Frederick Chin
 
Accepted:
 
MORTGAGE AND REALTY TRUST
   
/s/ C.W. Strong, Jr.                    April 12, 1995     
- -------------------------------------   ----------------------------------------
C.W. Strong, Jr.                        Date
President
 
                                      C-6
<PAGE>
 
                                                              EXHIBIT B (1 OF 2)
                           MORTGAGE AND REALTY TRUST
                 BOOK BALANCE AND VALUATION FOR SELECTED ASSETS
                            AND EXTRAPOLATED VALUES
                              AS OF MARCH 31, 1995
 
<TABLE>   
<CAPTION>                   
                                                                                          3/31/95       3/31/95    TOTAL PORTFOLIO
                                   3/31/95       3/31/95      3/31/95       3/31/95      ASSET PV     ASSET PV %     BOOK VALUE
 ASSET                     ASSET     BOOK     BOOK BALANCE    UPDATED      ASSET PV     PERCENTAGE       OF BV         3/31/95
  NO.     PROPERTY NAME    CODE    BALANCE    BY ASSET TYPE  VALUATION   BY ASSET TYPE OF BOOK VALUE BY ASSET TYPE  BY ASSET TYPE
 -----  ----------------   ----- ------------ ------------- ------------ ------------- ------------- ------------- ---------------
 <C>    <S>                <C>   <C>          <C>           <C>          <C>           <C>           <C>           <C>
  594   Six Sentry            A  $    750,000               $    638,068                   85.08%
        Associates (1       
        bldg)               
  655   Pacesetter            A     8,867,030                  8,738,012                   98.54%
        Business            
  658   Caltrans--            A    12,043,371                 10,176,887                   84.50%
        Freeway Corp.       
        Park                
  621   Lion Associates       A    16,608,233                 15,687,347                   94.46%
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTALS FOR                        $ 38,268,634               $ 35,240,314                   92.09%      $ 59,077,108
        ASSET CODE A        
- ----------------------------------------------------------------------------------------------------------------------------------
  641   Midis Property        B     6,251,012                  5,365,783                   85.84%
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTALS FOR                           6,251,012                  5,365,783                   85.84%        18,048,800
        ASSET CODE B        
- ----------------------------------------------------------------------------------------------------------------------------------
  452   Keewaydin             C     5,172,957                  3,216,785                   62.18%
  590   Berdon Plaza          C     7,547,467                  6,752,852                   89.47%
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTALS FOR                          12,720,424                  9,969,637                   78.38%        34,416,865
        ASSET CODE C        
- ----------------------------------------------------------------------------------------------------------------------------------
  609   Cascade Drive         D     7,862,638                  6,068,928                   77.19%
  639   East Bradford         D    10,612,663                  8,579,892                   80.85%
        Associates          
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTALS FOR                          18,475,301                 14,648,820                   79.29%        30,407,726
        ASSET CODE D        
- ----------------------------------------------------------------------------------------------------------------------------------
  646   McLaughlin            E     4,296,330                  3,658,732                   85.16%
  421   Parkway Business      E     5,160,009                  3,302,134                   63.99%
        Center              
  467   North County          E     5,845,086                  4,848,818                   82.96%
  647   Moreno Valley         E     5,899,121                  5,391,718                   91.40%
  574   Burtonsville          E     5,999,782                  5,061,194                   84.36%
        Commerce            
  687   Six Sentry            E     6,537,739                  4,903,919                   75.01%
        Parkway (5          
        bldgs)              
  498   Junipers at           E     7,605,269                  8,591,887                  112.97%
        Yarmouth            
  673   Arcade                E     7,650,833                  5,839,994                   76.33%
  643   Villa Del Cresta      E     9,022,369                  9,054,281                  100.35%
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTAL FOR                           58,016,538                 50,652,677                   87.31%        72,641,217
        ASSET CODE E        
- ----------------------------------------------------------------------------------------------------------------------------------
  563   Slauson Business      F     6,434,348                  2,694,681                   41.88%
        Center              
  447   Riverside Center      F     7,641,272                  6,642,051                   86.92%
  558   Pinebrook             F     8,099,165                  3,918,719                   48.38%
        Business Center     
  448   Stadium Towers        F     8,511,892                  3,821,480                   44.90%
  672   Paseo Padre           F    23,930,469                 21,896,218                   91.50%
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTALS FOR                          54,617,146                 38,973,149                   71.36%        56,939,709
        ASSET CODE F        
- ----------------------------------------------------------------------------------------------------------------------------------
  576   Keystone 1            G     4,769,853                  5,035,946                  105.58%
  591   Creekside Center      G     7,492,088                  6,489,692                   86.62%
        Associates          
  630   Newark C & C          G     9,615,859                  7,354,002                   76.48%
        Associates          
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTALS FOR                          21,877,800                 18,879,640                   86.30%        26,511,072
        ASSET CODE G        
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTALS FOR ASSET                                             Overall Average Assumed = >    82.64%           642,206
        CODE H              
- ----------------------------------------------------------------------------------------------------------------------------------
         SUBTOTALS FOR ASSET                                             Overall Average Assumed = >    82.64%            25,392
        CODE I              
- ----------------------------------------------------------------------------------------------------------------------------------
 TOTALS                          $210,226,855 $210,226,855  $173,730,020 $173,730,020      82.64%                   $298,710,095
- ----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>                   
                             
                            EXTRAPOLATED   
 ASSET                      PORTFOLIO PV 
  NO.     PROPERTY NAME     BY ASSET TYPE
 -----  ----------------    -------------
 <C>    <S>                 <C>          
  594   Six Sentry           
        Associates (1       
        bldg)               
  655   Pacesetter           
        Business            
  658   Caltrans--           
        Freeway Corp.       
        Park                
  621   Lion Associates      
- -----------------------------------------
         SUBTOTALS FOR       
          ASSET CODE A      $ 54,402,147
- -----------------------------------------
  641   Midis Property       
- -----------------------------------------
         SUBTOTALS FOR       
          ASSET CODE B        15,492,842
- -----------------------------------------
  452   Keewaydin            
  590   Berdon Plaza         
- -----------------------------------------
         SUBTOTALS FOR       
          ASSET CODE C        26,974,231
- -----------------------------------------
  609   Cascade Drive        
  639   East Bradford        
        Associates          
- -----------------------------------------
         SUBTOTALS FOR       
          ASSET CODE D        24,109,881
- -----------------------------------------
  646   McLaughlin           
  421   Parkway Business     
        Center              
  467   North County         
  647   Moreno Valley        
  574   Burtonsville         
        Commerce            
  687   Six Sentry           
        Parkway (5          
        bldgs)              
  498   Junipers at          
        Yarmouth            
  673   Arcade               
  643   Villa Del Cresta     
- -----------------------------------------
         SUBTOTAL FOR        
          ASSET CODE E        63,421,090
- -----------------------------------------
  563   Slauson Business     
        Center              
  447   Riverside Center     
  558   Pinebrook            
        Business Center     
  448   Stadium Towers       
  672   Paseo Padre          
- -----------------------------------------
         SUBTOTALS FOR       
          ASSET CODE F        40,630,460
- -----------------------------------------
  576   Keystone 1           
  591   Creekside Center     
        Associates          
  630   Newark C & C         
        Associates          
- -----------------------------------------
         SUBTOTALS FOR       
          ASSET CODE G        22,877,963
- -----------------------------------------
         SUBTOTALS FOR ASSET 
          CODE H                 530,715
- -----------------------------------------
         SUBTOTALS FOR ASSET 
          CODE I                  20,984
- -----------------------------------------
 TOTALS                     $248,460,312
- -----------------------------------------
                                                                                        ----------
                                       OVERALL AVERAGE PV PERCENTAGE OF BOOK VALUE = >    83.18%
                                                                                        ----------
                                              (BASED UPON EXTRAPOLATION BY ASSET TYPE)
</TABLE>    
 
                                      C-7
<PAGE>
 
                                                              EXHIBIT B (2 OF 2)
 
                           MORTGAGE AND REALTY TRUST
                              INDEX TO ASSET CODES
 
<TABLE>
<CAPTION>
      ASSET CODE     MRT ASSET TYPE                   DESCRIPTION
      ----------     --------------                   -----------
      <S>            <C>                <C>
          A             Earn Mtg        Performing Mortgage
          B             NE ISF          In-Substance Foreclosure (Non-Earning)
          C             NE REO          Real Estate Owned (Non-Earning)
          D             E ISF           In-Substance Foreclosure (Earning)
          E             E REO           Real Estate Owned (Earning)
          F             Equity          Investments in Real Estate
          G             Part            Investments in Real Estate (Partnership)
          H             Note Rec        Note Receivable
          I             NE Mtge         Non-Earning Mortgage
</TABLE>
 
                                      C-8
<PAGE>
 
                                                              EXHIBIT C (1 OF 2)
 
                           MORTGAGE AND REALTY TRUST
                    RANGE OF ENTERPRISE GOING CONCERN VALUE*
                              AS OF MARCH 31, 1995
 
<TABLE>
<CAPTION>
                                                                (000 OMITTED)
<S>                                                           <C>
Extrapolated Valuation of Portfolio as of March 31, 1995 per
 Exhibit A (Note A)..........................................          $248,500
Adjustments (B)
 Add: Cash on Hand...........................................             1,500
    Marketable Securities....................................            71,600
    Accounts Receivable and Other Assets.....................             3,700
                                                              -----------------
                                                                        325,300
 Less: Outstanding Debt--Imperial............................            17,600
    Deferred Compensation....................................               400
    Accounts Payable and Accrued Expenses....................             3,400
    Employee Termination Pay Plan............................             1,400
                                                              -----------------
                                                                        302,500
 Less: NPV of operating expenses (C).........................            27,300
                                                              -----------------
                                                                       $275,200
                                                              =================
Range of Enterprise Going Concern Value March 31, 1995 (D)... $265,000--285,000
                                                              =================
</TABLE>
- --------
*Rounded to the nearest $100,000
 
 
                                                       (See Next Page for Notes)
 
                                      C-9
<PAGE>
 
                                                              EXHIBIT C (2 OF 2)
                           MORTGAGE AND REALTY TRUST
                    RANGE OF ENTERPRISE GOING CONCERN VALUE
                              AS OF MARCH 31, 1995
 
                                     NOTES
 
(A) The valuation of the asset portfolio assumes continued operation of the
    portfolio for several years. Sales and pay-offs of certain assets occur
    throughout the analysis period. Property cash flows, loan payments and pay-
    offs, and reversion amounts (based on normalized capital expenditures in
    the reversion year) were discounted to present value at 12 percent per
    year. Amounts DO NOT include extraordinary expenses for reorganization or
    litigation.
 
(B) Amounts per Mortgage and Realty Trust--Quarterly Report pursuant to Section
    12 or 15(d) of the Securities Exchange Act of 1934--period ended March 31,
    1995.
 
(C) For purposes of determining enterprise value, it was assumed that operating
    expenses (G&A) would be incurred at the following levels in the future:
 
<TABLE>
<CAPTION>
                    AMOUNT                                                YEAR
                    ------                                                ----
                  <S>                                                     <C>
                  $4,000,000                                              1
                   3,500,000                                              2
                   3,000,000                                              3
                   3,000,000                                              4
                   3,000,000                                              5
                   3,000,000                                              6
</TABLE>
 
  The impact of G&A expenses has been reflected as a direct reduction of
  total value. The present value of the G&A expenses was calculated by
  applying a capitalization rate of 10 percent to Year 6 stabilized G&A
  expenses and discounting both the capitalized, stabilized Year 6 expenses
  and the annual expenses at 12 percent.
 
(D) The enterprise valuation assumes the portfolio is operated during the
    projection period and that no additional investments are made. An
    alternative enterprise valuation could be presented wherein the proceeds
    from portfolio operations are used for alternative business purposes, e.g.,
    new mortgages, other real estate investments, etc., and general and
    administrative expenses are incurred to sustain such operations. Such
    alternative valuation has not been presented herein.
 
  The Range of Enterprise Going Concern Value is presented excluding
  liabilities for senior notes outstanding and accrued and unpaid interest.
 
                                      C-10
<PAGE>
 
                                                                         ANNEX D
 
                   [Paste-Up of Kenneth Leventhal & Company]
 
Mortgage and Realty Trust
Elkins Park, Pennsylvania
 
  This report sets forth a summary of the work performed by Kenneth Leventhal &
Company ("KL") at the request of Mr. C. W. Strong, Jr., President, Mortgage and
Realty Trust ("MRT"). The work performed included the procedures outlined in
our engagement letter dated April 12, 1995 (Exhibit A). It is our understanding
that the work performed by KL as summarized herein will be utilized by MRT in
connection with a judicial restructuring of MRT. Accordingly, this report is
intended solely for your use in connection with such judicial restructuring
transaction and is not to be otherwise used, circulated, quoted or referred to
in any manner. In addition, our letter of April 12, 1995 contains specific
limitations with respect to the analytical procedures performed in connection
with this engagement and is incorporated in its entirety by reference herein.
 
ENGAGEMENT APPROACH
 
  We obtained selected financial information prepared by MRT as of March 31,
1995. Utilizing this information, we selected 26 assets representing mortgage
loans, investments, in substance foreclosure assets, and real estate equities
owned. The selection was divided between the "West Coast" and "East Coast"
portfolios and generally represented the assets with the highest dollar values
in the portfolio. In addition, as summarized in Exhibit B to this report, the
selection of assets included different portfolio classifications.
 
  For the assets selected as outlined above, the following procedures were
performed:
 
  .  We obtained the most recent "Argus" property cash flow projections.
 
  .  We obtained, where applicable, the most recent operating rent roll and
     other financial information.
 
  .  We obtained the most recent appraisals, where applicable and available.
 
  .  We obtained the previous KL analytical procedures performed as of March
     1993 and July 1994.
 
  .  We discussed the current status of each selected asset with the
     respective MRT asset manager to determine loan status, property
     characteristics, current occupancy, existing market rental rates, new
     leases, current payoff discussions, asset sales, etc.
 
  .  We reviewed limited market information including selected submarket
     information, if available.
 
  .  We modified the MRT assumptions, as necessary, to conform to certain
     known current market conditions and our understanding of the assets.
 
  .  We updated the valuation model prepared by KL in 1993 and 1994 utilizing
     current market and/or assumption modifications determined from the
     procedures outlined above.
 
  .  We capitalized Net Operating Income from Year 2 as derived by the KL
     valuation model at both 14 and 16 percent capitalization rates to
     determine a high and low range of liquidation values for the selected
     assets.
 
  We believe that the procedures outlined above, when applied to 26 of the
largest assets in the MRT portfolio, provide a sufficient mathematical basis
for extrapolation of the values to the remaining portfolio in order to
calculate a range of liquidation values. The liquidation valuation as of March
31, 1995 utilizes the most recently available financial statements of MRT and
adjusts the analyses outlined above as summarized in the notes to Exhibit B
included herein.
 
                                      D-1
<PAGE>
 
  The results of our procedures as outlined above are summarized in Exhibit B.
 
  You have requested that we determine the valuation of the portfolio on a
liquidation basis. The assumptions utilized by MRT and reviewed by us included
expected collection of amounts due on mortgage loans and cash flows from
operating properties. The Range of Liquidation Values (Exhibit B) approximates
the amounts that may be realized upon an immediate liquidation of MRT. For
purposes of this analysis it was assumed that the portfolio would be liquidated
within a twelve-month period of time under a judicially mandated liquidation
process.
 
  The MRT portfolio is diverse in type as well as geographic distribution. The
liquidation scenario presented herein assumes the accelerated liquidation of
the portfolio in a series of individual and discrete transactions. Other
liquidation scenarios could be presented which might include the disposition of
the portfolio in bulk or selected pool dispositions of assets with similar
qualities, characteristics and geographic locations.
 
                                          Kenneth Leventhal & Company
May 15, 1995
 
                                      D-2
<PAGE>
 
 
- --------------------------------------------------------------------------------
 
                              SUMMARY OF EXHIBITS
 
- --------------------------------------------------------------------------------
 
A. Engagement Letter dated April 12, 1995
 
B. Range of Liquidation Values and Supporting Analyses
 
 
 
 
                                      D-3
<PAGE>
 
                                                              EXHIBIT A (1 OF 3)
 
April 12, 1995
 
Mr. C.W. Strong, Jr.
President
Mortgage and Realty Trust
3500 West Olive Avenue
Suite 600
Burbank, CA 91505-4628
 
Dear Mr. Strong:
 
  In accordance with your request, this letter sets forth our understanding and
agreement with respect to the work Kenneth Leventhal & Company will perform in
connection with the valuation of Mortgage and Realty Trust's investment
portfolio, including mortgage loans, property acquired through foreclosure and
held for sale, in-substance foreclosures, participating loans, amortizing
loans, realty equities, real estate equities and investments in partnerships.
Our work is being performed to update our previous work to assist MRT and its
various interested creditor parties in determining an appropriate basis of
valuation for a potential restructuring transaction. This letter summarizes the
scope of services we will provide, project approach, engagement staffing,
timing and estimated fees.
 
BACKGROUND AND OUR UNDERSTANDING
 
  Kenneth Leventhal & Company ("KL") is familiar with the Mortgage and Realty
Trust ("MRT") portfolio as a result of a comprehensive due diligence project
undertaken in early 1993 on behalf of a potential equity investor and
individual asset valuations and an "Entity" valuation as of June 30, 1994
undertaken for MRT. At the time of the 1993 engagement, KL performed
comprehensive due diligence of all assets in the MRT portfolio. The asset
valuations as of June 30, 1994, updated the valuations for 26 of MRT's assets.
 
  It is our understanding that MRT desires assistance in determining valuations
for the MRT portfolio (as described above) for the purposes of considering
various restructuring alternatives. MRT, through its various financial advisors
and in connection with its ongoing discussions with various creditor groups,
has performed comprehensive analyses of their investment portfolio and certain
other interim valuations have been performed by other outside consultants. It
is contemplated that all previous data and information relative to the
portfolio maintained by MRT will be made available to KL to assist them in
performing the presently requested services.
 
  The valuation consulting services applied to the MRT portfolio as of June 30,
1994 will be updated to March 31, 1995. The valuation services to be provided
will not constitute independent asset appraisals performed in accordance with
standards established by the Appraisal Institute or other professional bodies.
The procedures will be designed to determine an estimated range of value of the
MRT portfolio on a going-concern basis, that is, on a basis that does not
contemplate an accelerated liquidation, bulk sale of assets or other form of
distressed sale. The procedures will also be designed to present a range of
liquidation values for the MRT portfolio to approximate the amount that may be
realized upon a current market accelerated liquidation.
 
ENGAGEMENT APPROACH
 
  In consideration of the previous work performed by KL, this engagement will
be designed to utilize all existing information to the fullest extent possible.
The procedures of this engagement will be designed to update the June 30, 1994
values as of March 31, 1995 and will be substantially similar to those
performed for the valuation as of June 30, 1994. This work will be conducted on
the 26 assets previously valued. Any of those 26 assets which have been
disposed of will be replaced by assets with the highest book value that were
not previously tested.
 
                                      D-4
<PAGE>
 
                                                              EXHIBIT A (2 OF 3)
 
  In summary, the procedures to be performed in connection with the 26 assets
will include the following.
 
  .  Obtain the most recent "Argus" property cashflow projections.
 
  .  Obtain the most recent operating rent rolls and other financial
     information.
 
  .  Obtain the most recent appraisals, where available.
 
  .  Obtain the previous KL portfolio analyses from March 1993 and June 30,
     1994.
 
  .  Discuss the current status with the asset manager to determine loan
     status, foreclosure property characteristics, including current
     occupancy, existing market rental rates, new leases, current payoff
     discussions, asset sales, etc.
 
  .  Review and update market information for the properties, including
     selected submarket information, if available.
 
  .  Modify MRT assumptions, as necessary, to conform to current updated
     market conditions.
 
  .  Update the valuation model prepared by KL in 1993 utilizing current
     market and/or assumption modifications determined from the procedures
     provided above.
 
  .  Calculate estimated range of asset values on both a going-concern and
     liquidation value basis.
 
  We believe that the procedures outlined above, applied to 26 of the largest
assets in the MRT portfolio, will provide a sufficient mathematical basis for
extrapolation of characteristics to the remaining portfolio and, therefore,
provide an acceptable basis for the calculation of appropriate valuation ranges
on both the going-concern and liquidation basis.
 
  In addition to the specific valuation procedures outlined above, KL is
prepared to assist both MRT and its creditor groups with further refinements to
the valuation and other assistance which may be required in connection with the
potential restructuring alternatives presently considered.
 
ENGAGEMENT STAFFING
 
  In light of the accelerated timetable mandated for this engagement, the
project will be undertaken by KL personnel on the east coast and west coast
simultaneously. Stephen G. Finn will serve as the overall engagement partner,
assisted by Mr. Frederick Chin, the Director of KL's valuation practice in Los
Angeles. Both Mr. Chin and Mr. Finn will be assisted by staff from KL's various
offices.
 
  It is anticipated that the procedures outlined above will require
approximately 30 to 45 business days to complete and, therefore, a date of May
31, 1995 is the projected completion date.
 
ESTIMATED FEES
 
  It is anticipated that the procedures outlined above will utilize, to a
significant extent, data prepared by KL and MRT in connection with the previous
portfolio analyses. Our work will also encompass a review of the portfolio
updated valuation procedures performed by MRT to provide a basis for us to
conclude the appropriateness of extrapolating the valuation characteristics of
the 26 assets selected to the entire portfolio. The estimated fees to perform
updated valuations of the 26 selected assets will be $2,000 per asset plus
applicable out-of-pocket expenses. The total estimated fees for this update,
exclusive of any professional services requested to comply with Bankruptcy or
SEC reporting requirements, will be $50,000 -$60,000.
 
  As noted above, the engagement is being approached so as to permit
modification or expansion of procedures to the entire portfolio, if considered
necessary by MRT and its advisors. To the extent an expansion of procedures is
considered necessary or additional tasks are required, supplemental letters of
understanding will be prepared with appropriate estimates of fees and tasks
described herein.
 
                                      D-5
<PAGE>
 
                                                              EXHIBIT A (3 OF 3)
 
  It is understood that the work outlined herein is being performed at the
request of MRT for their use in connection with discussions with various
interested creditor groups. It is further understood that certain portions of
KL's work product may be made available to MRT for use in their bankruptcy/SEC
proxy filing. As the engagement progresses, KL will make periodic status
reports to MRT. It is understood that the work undertaken by KL is of a
confidential nature and will not be utilized by KL or communicated to any other
parties without the express, written authorization from MRT.
 
  In addition to the valuation services outlined above, KL is available to
assist MRT with implementation issues associated with "Fresh Start" accounting
(FAS-SOP-90-7). This assistance may include allocation methodology for asset
valuations or the determination of the "Fresh Start" Balance Sheet. Our charges
for this additional assistance will be made at our standard billing rates, with
a budget estimate, per task approved by you in advance.
 
  As noted above, KL may be called upon to present additional information,
reports, consents, testimony, meetings and consultations in connection with the
restructuring process currently under way. The charges outlined above to update
our valuation do not attempt to estimate such restructuring process costs. To
the extent services are requested outside the scope of the work contemplated
above, we will 1) notify you and 2) bill such time at our normal standard rates
of $80--$350 per hour.
 
  Either party may terminate this letter agreement at any time upon written
notice, without liability or continuing obligation except that neither the
termination nor completion of this assignment shall affect: (a) any
compensation earned by KL up to the date of termination or completion, as the
case may be, or (b) the reimbursement of expenses incurred by KL up to the date
of termination or completion, as the case may be.
 
  We appreciate the opportunity to be of continued service to Mortgage and
Realty Trust and look forward to beginning this work immediately.
 
                                          Very truly yours,
                                             
                                          /s/ Stephen G. Finn     
                                          -------------------------------------
                                             
                                          Stephen G. Finn     
                                             
                                          of Kenneth Leventhal & Company     
                                                 
SGF/ld
 
cc: Frederick Chin
 
Accepted:
 
MORTGAGE AND REALTY TRUST
                                        
/s/ C.W. Strong, Jr.                    April 12, 1995     
- -------------------------------------   ----------------------------------------
                                        
C.W. Strong, Jr.                        Date     
   
President     
 
                                      D-6
<PAGE>
 
                                                              EXHIBIT B (1 OF 4)
 
                           MORTGAGE AND REALTY TRUST
                          RANGE OF LIQUIDATION VALUES
                              AS OF MARCH 31, 1995
 
<TABLE>
<CAPTION>
                                                                    RANGE
                                                              -----------------
                                                                LOW      HIGH
                                                              -------- --------
                                                                (000 OMITTED)
<S>                                                           <C>      <C>
Extrapolated Liquidation Value of Portfolio (A).............. $192,600 $218,100
Adjustments:
 Add: Cash on Hand (B).......................................    1,500    1,500
    Marketable Securities (B)................................   71,600   71,600
    Accounts Receivable and Other Assets (A)(B)..............    1,800    3,700
                                                              -------- --------
                                                               267,500  294,900
 Less: Outstanding Debt--Imperial (B)........................   17,600   17,600
    Deferred Compensation (B)................................      400      400
    Accounts Payable and Accrued Expenses (B)................    3,400    3,400
    Termination Pay Plan (A) (C).............................    1,400    1,400
    Wind Down G&A Expenses (A)...............................    5,000    5,000
    Legal, Liquidation Costs, etc. (A).......................   10,000    8,000
                                                              -------- --------
                                                              $229,700 $259,100
                                                              ======== ========
Range of Liquidation Values, March 31, 1995.................. $220,000 $260,000
                                                              ======== ========
</TABLE>
 
 
                                                       (See Next Page for Notes)
 
                                      D-7
<PAGE>
 
                                                              EXHIBIT B (2 OF 4)
 
                           MORTGAGE AND REALTY TRUST
                          RANGE OF LIQUIDATION VALUES
                              AS OF MARCH 31, 1995
 
                                     NOTES
 
(A) For the purpose of determining a range of liquidation values, the following
    assumptions were utilized:
 
  .  All assets in the portfolio were disposed of within a twelve-month
     period under a judicially mandated process.
 
  .  The assets were sold in discrete individual transactions, not in a bulk
     sale.
 
  .  The Extrapolated Liquidation Value of the Portfolio was determined by
     applying capitalization rates of 14 percent (high) and 16 percent (low)
     to the net operating income for selected assets for the 12 month period
     from April 1996 to March 1997. These capitalized values were
     extrapolated to the entire MRT portfolio. Real estate assets with
     outstanding offers for sale at the valuation date were included at their
     offer price. Sales proceeds were reduced by estimated selling expenses
     of five percent.
 
  .  Performing real estate loans were assumed sold at discounts from book
     value of 10 percent (high) and 20 percent (low).
 
  .  Accounts Receivable and Other Assets are considered 50 percent
     collectible (low) or 100% collectible (high).
 
  .  Termination Pay Plan has been estimated at approximately $1.4 million.
 
  .  Wind Down G&A expenses were assumed to be $5 million.
 
  .  Legal, accounting and other costs associated with the judicial
     liquidation were assumed to be between $8 million (high) and $10 million
     (low).
 
(B) Amounts per Mortgage and Realty Trust--Quarterly Report pursuant to Section
    12 or 15(d) of the Securities Exchange Act of 1934--period ended June 10,
    1994.
 
(C) Amount per Mortgage and Realty Trust Form 10Q as of March 31, 1995.
 
                                      D-8
<PAGE>
 
                                                              EXHIBIT B (3 OF 4)
 
                           MORTGAGE AND REALTY TRUST
                               LIQUIDATION VALUE
                               CAPITALIZED AT 14%
 
<TABLE>
<CAPTION>
                                                          APRIL 1996   APRIL 1996
                                                              NET      ASSET NOI
   ASSET   ASSET                                ASSET      OPERATING    CAPPED @
 CONTROL # TYPE         ASSET NAME              TYPE        INCOME        14%
 --------- -----        ----------          ------------- ----------- ------------
 <C>       <C>   <S>                        <C>           <C>         <C>
    594       A  Six Sentry Parkway (1        Earn Mtg.        62,430      445,929
                  bldg.)
- -----------------------------------------------------------------------------------
    658       A  Caltrans-Freeway Corp.       Earn Mtg.     1,825,187   13,037,050
                  Park
- -----------------------------------------------------------------------------------
    655       A  Pacesetter Business          Earn Mtg.     1,110,377    7,931,264
- -----------------------------------------------------------------------------------
    621       A  Gordon Drive                 Earn Mtg.     2,312,788   16,519,914
- -----------------------------------------------------------------------------------
    641       B  Midis Property                NE ISF         651,619    4,654,421
- -----------------------------------------------------------------------------------
    590       C  Berdon Plaza                  NE REO         917,141    6,551,007
- -----------------------------------------------------------------------------------
    452       C  Keewaydin                     NE REO         394,853    2,820,379
- -----------------------------------------------------------------------------------
    639       D  East Bradford Associates       E ISF         883,152    6,308,229
- -----------------------------------------------------------------------------------
    609       D  Cascade Drive                  E ISF         872,415    6,231,536
- -----------------------------------------------------------------------------------
    643       E  Villa Del Cresta               E REO       1,163,212    8,308,657
- -----------------------------------------------------------------------------------
    421       E  Parkway Business Center        E REO         506,442    3,617,443
- -----------------------------------------------------------------------------------
    467       E  North County                   E REO         628,208    4,487,200
- -----------------------------------------------------------------------------------
    498       E  Junipers at Yarmouth           E REO         860,871    6,149,079
- -----------------------------------------------------------------------------------
    647       E  Moreno Valley (BIF)            E REO         539,161    3,851,150
- -----------------------------------------------------------------------------------
    646       E  McLaughlin Apartments          E REO         456,150    3,258,214
- -----------------------------------------------------------------------------------
    673       E  Arcade                         E REO         737,397    5,267,121
- -----------------------------------------------------------------------------------
    687       E  Six Sentry Parkway (5          E REO         665,225    4,751,607
                  bldgs.)
- -----------------------------------------------------------------------------------
    574       E  Burtonsville Commerce          E REO         653,772    4,669,800
- -----------------------------------------------------------------------------------
    447       F  Riverside Center              Equity         860,845    6,148,893
- -----------------------------------------------------------------------------------
    563       F  Slauson Business Center       Equity         299,965    2,142,607
- -----------------------------------------------------------------------------------
    672       F  Paseo Padre                   Equity       2,541,631   18,154,507
- -----------------------------------------------------------------------------------
    558       F  Pinebrook Business            Equity         645,255    4,608,964
                  Center
- -----------------------------------------------------------------------------------
    448       F  Stadium Towers                Equity         529,117    3,779,407
- -----------------------------------------------------------------------------------
    591       G  Creekside Center           Participation     809,083    5,779,164
                  Associates
- -----------------------------------------------------------------------------------
    630       G  Newark C&C Associates      Participation     943,059    6,736,136
- -----------------------------------------------------------------------------------
    576       G  Keystone I                 Participation     543,016    3,878,686
- -----------------------------------------------------------------------------------
                 TOTALS                                   $22,412,371 $160,088,364
              ---------------------------------------------------------------------
                 Extrapolated Portfolio NOI Capped at 14%              227,468,610
                 ADD: 90% of Face Value of Performing Loans           $ 53,169,397
                 ADD: Proceeds from Sale of Junipers at Yarmouth         9,000,000
                 LESS: Extrapolated Value of Performing Loans          (53,900,420)
                 LESS: Capitalized NOI of Junipers at Yarmouth          (6,149,079)
                                                                      ------------
                   Subtotal:                                           229,588,509
                                                                      ------------
                 LESS: Selling and Disposition Expenses                (11,479,425)
                                                                      ------------
                 EXTRAPOLATED VALUE OF PORTFOLIO                      $218,109,083
                                                                      ============
</TABLE>
 
                                      D-9
<PAGE>
 
                                                              EXHIBIT B (4 OF 4)
 
                           MORTGAGE AND REALTY TRUST
                               LIQUIDATION VALUE
                               CAPITALIZED AT 16%
 
<TABLE>
<CAPTION>
                                                          APRIL 1996   APRIL 1996
                                                              NET      ASSET NOI
   ASSET   ASSET                                ASSET      OPERATING    CAPPED @
 CONTROL # TYPE         ASSET NAME              TYPE        INCOME        16%
 --------- -----        ----------          ------------- ----------- ------------
 <C>       <C>   <S>                        <C>           <C>         <C>
    594       A  Six Sentry Parkway (1        Earn Mtg.        62,430      390,188
                  bldg.)
- -----------------------------------------------------------------------------------
    658       A  Caltrans-Freeway Corp.       Earn Mtg.     1,825,187   11,407,419
                  Park
- -----------------------------------------------------------------------------------
    655       A  Pacesetter Business          Earn Mtg.     1,110,377    6,939,856
- -----------------------------------------------------------------------------------
    621       A  Gordon Drive                 Earn Mtg.     2,312,788   14,454,925
- -----------------------------------------------------------------------------------
    641       B  Midis Property                NE ISF         651,619    4,072,619
- -----------------------------------------------------------------------------------
    590       C  Berdon Plaza                  NE REO         917,141    5,732,131
- -----------------------------------------------------------------------------------
    452       C  Keewaydin                     NE REO         394,853    2,467,831
- -----------------------------------------------------------------------------------
    639       D  East Bradford Associates       E ISF         883,152    5,519,700
- -----------------------------------------------------------------------------------
    609       D  Cascade Drive                  E ISF         872,415    5,452,594
- -----------------------------------------------------------------------------------
    643       E  Villa Del Cresta               E REO       1,163,212    7,270,075
- -----------------------------------------------------------------------------------
    421       E  Parkway Business Center        E REO         506,442    3,165,263
- -----------------------------------------------------------------------------------
    467       E  North County                   E REO         628,208    3,926,300
- -----------------------------------------------------------------------------------
    498       E  Junipers at Yarmouth           E REO         860,871    5,380,444
- -----------------------------------------------------------------------------------
    647       E  Moreno Valley (BIF)            E REO         539,161    3,369,756
- -----------------------------------------------------------------------------------
    646       E  McLaughlin Apartments          E REO         456,150    2,850,938
- -----------------------------------------------------------------------------------
    673       E  Arcade                         E REO         737,397    4,608,731
- -----------------------------------------------------------------------------------
    687       E  Six Sentry Parkway (5          E REO         665,225    4,157,656
                  bldgs.)
- -----------------------------------------------------------------------------------
    574       E  Burtonsville Commerce          E REO         653,772    4,086,075
- -----------------------------------------------------------------------------------
    447       F  Riverside Center              Equity         860,845    5,380,281
- -----------------------------------------------------------------------------------
    563       F  Slauson Business Center       Equity         299,965    1,874,781
- -----------------------------------------------------------------------------------
    672       F  Paseo Padre                   Equity       2,541,631   15,885,194
- -----------------------------------------------------------------------------------
    558       F  Pinebrook Business            Equity         645,255    4,032,844
                  Center
- -----------------------------------------------------------------------------------
    448       F  Stadium Towers                Equity         529,117    3,306,981
- -----------------------------------------------------------------------------------
    591       G  Creekside Center           Participation     809,083    5,056,769
                  Associates
- -----------------------------------------------------------------------------------
    630       G  Newark C&C Associates      Participation     943,059    5,894,119
- -----------------------------------------------------------------------------------
    576       G  Keystone I                 Participation     543,016    3,393,850
- -----------------------------------------------------------------------------------
                 TOTALS                                   $22,412,371 $140,077,319
              ---------------------------------------------------------------------
                 Extrapolated Portfolio NOI Capped at 14%              199,035,034
                 ADD: 80% of Face Value of Performing Loans           $ 47,261,686
                 ADD: Proceeds from Sale of Junipers at Yarmouth         9,000,000
                 LESS: Extrapolated Value of Performing Loans          (47,162,867)
                 LESS: Capitalized NOI of Junipers at Yarmouth          (5,380,444)
                                                                      ------------
                   Subtotal:                                           202,753,409
                                                                      ------------
                 LESS: Selling and Disposition Expenses                (10,137,670)
                                                                      ------------
                 EXTRAPOLATED VALUE OF PORTFOLIO                      $192,615,739
                                                                      ============
</TABLE>
 
                                      D-10
<PAGE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

(MARK ONE)
 /X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                           ACT OF 1934 [FEE REQUIRED]

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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
                            ------------------------

          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 ___
                            ------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

    None.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                                     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

    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

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

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

    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

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

    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.

                                       7

                           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

                           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

    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

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

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

                                    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

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

    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

    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

                                    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

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

    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

                               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

    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

    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

<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

                                    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

                                   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

                           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

                         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

                            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

                                 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

                            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

                       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

                       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

                 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

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

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

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%.


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

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

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

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

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

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

                           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

                           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

                           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

                           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

                           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

                           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

<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)
                                                                ---------------  ---------------  ---------------
                                                                ---------------  ---------------  ---------------
</TABLE> 
- ------------------------
NOTE  -- Primary  earnings per share  is based  on the average  number of shares
outstanding.

<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

<PAGE>

[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE> 
<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
[PREFERRED-MANDATORY]                                0
[PREFERRED]                                          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>
<PAGE>
 



                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-Q


(Mark One)

   /X/     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
           THE SECURITIES EXCHANGE ACT OF 1934

           For the quarterly period ended March 31, 1995

                                   OR

   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
           THE SECURITIES EXCHANGE ACT OF 1934

           For the transition period from ____________ to __________


Commission File Number 1-6613


                          MORTGAGE AND REALTY TRUST          
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)



            Maryland                                 23-1862664
 -------------------------------           --------------------------------
 (State or other jurisdiction of           (I.R.S. Employer Identification)
  incorporation or organization)


     8380 Old York Road, Suite 300
       Elkins Park, Pennsylvania                     19027-1590     
- - ---------------------------------------              ----------
(Address of principal executive offices)             (Zip Code)


Registrant's telephone number, including area code: (215) 881-1525

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                     Yes   X        No       
                                         -----         -----

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                                     Yes   X        No          
                                         -----         -----

Number of Common Shares Outstanding at March 31, 1995:

                                  11,226,215



                            MORTGAGE AND REALTY TRUST

                          INDEX OF FINANCIAL INFORMATION


PART I

           1.    Unaudited Financial Statements including the following:

                      Balance Sheet at March 31, 1995 and
                      September 30, 1994

                      Statement of Operations for the periods ended
                      March 31, 1995 and 1994

                      Statement of Cash Flows for the six months
                      ended March 31, 1995 and 1994

                      Statement of Shareholders' Equity for the six
                      months ended March 31, 1995

                      Notes to the Financial Statements

           2.    Management's Discussion and Analysis of Financial Condition
                 and Results of Operations


PART II

           3.    Defaults Upon Senior Securities

           6.    Exhibits and Reports on Form 8-K



                                       1


                      MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.      Financial Statements:

- --------------------------------------------------------------------------------
BALANCE SHEET
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                   March 31,          September 30,
                                                     1995                1994
                                                  ------------        -------------  
                                                  
<S>                                              <C>                 <C>

ASSETS:
Mortgage loans and investments:
  Standing loans                                 $ 54,272,000         $ 61,851,000
  Long-term amortizing loans                        2,694,000            2,908,000
  Participating loans and investments               1,960,000            4,563,000
  Non-earning                                          25,000                    -
                                                 ------------         ------------
                                                   58,951,000           69,322,000
                                                 ------------         ------------
Notes receivable                                      642,000              760,000
In-substance foreclosures:
  Earning                                          30,328,000           62,097,000
  Non-earning                                      18,018,000           10,198,000
Real estate:
  Investment in real estate equities, net          56,940,000           56,857,000
  Properties acquired through foreclosure and
    held for sale, net:
      Earning                                      72,642,000           68,437,000
      Non-earning                                  34,417,000           32,282,000
  Investment in partnerships, net                  26,511,000            9,524,000
                                                 ------------         ------------
                                                  298,449,000          309,477,000
         Less allowance for losses                (11,031,000)         (13,430,000)
                                                 ------------         ------------
                                                  287,418,000          296,047,000
Cash and cash equivalents                          73,140,000           60,332,000
Interest receivable and other assets                6,390,000            7,865,000
                                                 ------------         ------------
                                                 $366,948,000         $364,244,000
                                                 ============         ============
LIABILITIES:
Senior secured notes                             $290,000,000         $290,000,000
Loan on equity investment                          17,593,000           17,593,000
Accounts payable and accrued expenses               3,715,000            4,050,000
Interest payable                                   51,324,000           32,568,000
                                                 ------------         ------------
                                                  362,632,000          344,211,000
                                                 ------------         ------------
COMMITMENTS AND CONTINGENCIES (Note 3)

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                              (189,285,000)        (173,568,000)
                                                 ------------         ------------
      Total shareholders' equity                    4,316,000           20,033,000
                                                 ------------         ------------

                                                 $366,948,000         $364,244,000
                                                 ============         ============
</TABLE>

                                  See accompanying notes.

                                           2


                      MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.      Financial Statements (Continued)


- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Periods Ended March 31, (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                              Quarter Ended              Six Months Ended
                                        --------------------------   --------------------------
                                           3/31/95       3/31/94       3/31/95       3/31/94
                                        ------------   -----------   ------------   -----------

<S>                                     <C>            <C>           <C>            <C>

Income:
   Interest and fee income on mortgage
     loans                              $  2,303,000   $ 3,661,000   $  5,181,000   $ 7,666,000
   Income on rental properties:
      Rental income                        5,825,000     4,167,000     11,517,000     8,469,000
      Operating expense reimbursement        590,000       418,000      1,167,000       849,000
   Interest on short-term investments      1,042,000       140,000      1,864,000       234,000
   Other                                      14,000        34,000         47,000        48,000
                                        ------------   -----------   ------------   -----------
                                           9,774,000     8,420,000     19,776,000    17,266,000
                                        ------------   -----------   ------------   -----------

EXPENSES:
   Interest                               10,273,000     7,663,000     19,832,000    15,462,000
   Expenses of rental properties:
      Depreciation and amortization        1,782,000     1,426,000      3,486,000     2,833,000
      Operating                            2,802,000     2,360,000      5,472,000     4,734,000
   Other operating expenses                1,045,000     1,382,000      2,198,000     2,628,000
   Provision for losses on mortgage
     loans and related investments         3,000,000             -      3,000,000             -
   Reorganization expenses                 1,135,000       741,000      1,505,000     1,417,000
                                        ------------   -----------   ------------   -----------
                                          20,037,000    13,572,000     35,493,000    27,074,000
                                        ------------   -----------   ------------   -----------

Net loss                                $(10,263,000)  $(5,152,000)  $(15,717,000)  $(9,808,000)
                                        ============   ===========   ============   ===========

PER SHARE:
   Net loss                                $(.91)        $(.46)        $(1.40)         $(.87)
                                           =====         =====         ======          =====

Weighted average number of common
  shares outstanding                     11,226,000    11,226,000    11,226,000     11,226,000


</TABLE>

                                  See accompanying notes.


                                            3



                      MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.      Financial Statements (Continued)

- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
Six Months Ended March 31, (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                1995                1994
                                                            -----------         ------------

<S>                                                         <C>                 <C>

Cash flows from operating activities:
  Net loss                                                  $(15,717,000)        $(9,808,000)
                                                            ------------         -----------
  Adjustments to reconcile net loss to net
   cash provided by operating activities:
    Depreciation and amortization on real estate               3,486,000           2,833,000
    Decrease in payables and accrued expenses                   (335,000)           (134,000)
    Increase in interest payable                              18,756,000          15,512,000
    Decrease (increase) in receivables and other assets        1,475,000            (399,000)
    Net change in interest reserves, deferred income            (349,000)           (455,000)
    Provision for losses                                       3,000,000                   -
    Recoveries of charge offs to allowance for losses            116,000              69,000
                                                            ------------         -----------
  Total adjustments                                           26,149,000          17,426,000
                                                            ------------         -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                     10,432,000           7,618,000
                                                            ------------         -----------
Cash flows from investing activities:
  Investments in real estate:
    Properties acquired through foreclosure                   (6,189,000)         (2,103,000)
    In-substance foreclosures                                    (97,000)         (1,030,000)
    Real estate equities                                      (1,349,000)           (738,000)
    Partnerships                                              (1,849,000)                  -
  Principal repayments on mortgage loans                         835,000          11,564,000
  Repayments on notes receivable                                 118,000             100,000
  Sale of foreclosed property                                  3,350,000           6,665,000
  Repayment on in-substance foreclosure                        7,557,000           2,338,000
                                                            ------------         -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES                      2,376,000          16,796,000
                                                            ------------         -----------
Net increase in cash and cash equivalents                     12,808,000          24,414,000
Cash and cash equivalents at beginning of period              60,332,000          11,451,000
                                                            ------------         -----------
Cash and cash equivalents at end of period                  $ 73,140,000         $35,865,000
                                                            ============         ===========

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTMENT AND
 FINANCING ACTIVITIES:

  Charge offs against allowance for losses                  $  5,515,000         $   758,000
                                                            ============         ===========
  Transfer of in-substance foreclosures to real estate
    and investment in partnerships                          $ 23,740,000         $ 5,556,000
                                                            ============         ===========
  Transfer of in-substance foreclosures to mortgage
    loans                                                   $    105,000         $         -
                                                            ============         ===========
  Transfer of mortgage loans to real estate and in-
    substance foreclosures                                  $  9,762,000         $   400,000
                                                            ============         ===========

</TABLE>

                                   See accompanying notes.

                                             4



                      MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.      Financial Statements (Continued)

- --------------------------------------------------------------------------------
STATEMENT OF SHAREHOLDERS' EQUITY
For the Six Months Ended March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                 Additional                        Total
                            Common Shares          Paid-In      Accumulated    Shareholders'
                          Shares      Amount       Capital        Deficit         Equity
                        -------------------------------------------------------------------

<S>                     <C>         <C>          <C>           <C>             <C>

Balance, beginning of
   period               11,226,000  $11,226,000  $182,375,000  $(173,568,000)  $20,033,000


Net loss                                                         (15,717,000)  (15,717,000)
                        ----------  -----------  ------------  -------------   -----------

Balance, end of
   period               11,226,000  $11,226,000  $182,375,000  $(189,285,000)  $ 4,316,000
                        ==========  ===========  ============  =============   ===========

</TABLE>

                                  See accompanying notes.


                                           5



                      MORTGAGE AND REALTY TRUST                       FORM 10Q


Item 1.   Financial Statements (Continued)


NOTES TO THE FINANCIAL STATEMENTS


NOTE 1.   BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION -


          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 $51.3 million through March 31, 1995 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.

          In April 1995, the Trust and certain holders of Senior Notes executed
          an agreement of understanding, pursuant to which such noteholders
          agreed to support the proposed restructuring.  On April 11, 1995,
          pursuant to such agreement, the Trust advanced $25 million towards
          the $50 million minimum payment required to implement the proposed
          restructuring.

          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.

          On March 30, 1995, the Trust filed preliminary solicitation materials
          with the SEC regarding the proposed restructuring and prepackaged
          chapter 11 bankruptcy.  Details of the proposed restructuring and
          prepackaged bankruptcy including the conditions to commencement and
          consummation of the restructuring and terms of the new debt securities
          to be received by the Senior Note holders under the prepackaged plan
          have not been finalized pending the filing of definitive 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 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



                                         6



                      MORTGAGE AND REALTY TRUST                       FORM 10Q


Item 1.   Financial Statements (Continued)


NOTES TO THE FINANCIAL STATEMENTS


NOTE 1.   BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (Continued)


          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.  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 accompanying unaudited financial statements have been prepared
          in accordance with generally accepted accounting principles for
          interim financial information and with the instructions to Form 10-Q
          and Article 10 of Regulation S-X.  Accordingly, they do not include
          all the information and footnotes required by generally accepted
          accounting principles for complete financial statements.  In the
          opinion of management, all adjustments (consisting of normal
          recurring accruals) considered necessary for a fair presentation
          have been included.  Operating results for the six months period
          ended March 31, 1995 are not necessarily indicative of the results
          that may be expected for the year ended September 30, 1995.



NOTE 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 year ended September 30, 1994 and the six months ended
          March 31, 1995, 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.


                                         7



                      MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.   Financial Statements (Continued)


NOTES TO THE FINANCIAL STATEMENTS


NOTE 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 for 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 intends 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
          November 1994 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.

          RENTAL INCOME  - Rental income is recognized on a straight-line basis
          over the applicable term of the lease.

          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.  At March 31, 1995, no
          assets were valued using the cost of capital method.

          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


                                      8                                      


                      MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.   Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS

NOTE 2.   SIGNIFICANT ACCOUNTING POLICIES (Continued)

          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.

          CONCENTRATION OF CREDIT RISKS - The Trust's mortgage loan portfolio is
          heavily concentrated in California (49%) and Pennsylvania (23%).  The
          mortgage loans are secured by the underlying real estate.  The real
          estate is subject to risks arising in connection with the underlying
          real estate, such as defaults or non-renewal of the tenant leases,
          increased operating costs, environmental problems and availability
          of financing.

          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").

          IN-SUBSTANCE FORECLOSURE - A loan is considered an in-substance fore-
          closure 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 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.

          Investments in real estate equities and properties acquired through
          foreclosure and held for sale and investments in partnerships are
          shown on the balance sheet, net of accumulated depreciation.

          CASH AND CASH EQUIVALENTS - Cash and cash equivalents include short-
          term investments (high grade commercial paper carried at cost of
          $71.6 million at March 31, 1995) with original maturities ranging 
          from 3 to 28 days.


                                         9


                      MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.   Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS

NOTE 2.   SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Included in cash and cash equivalents is $1.3 million of restricted
          cash which represents the funding of the employee retention plan (see
          Note 8) and $1.1 million related to borrowers' deposits. 


NOTE 3.   MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE

          The following table summarizes the Trust's mortgage loan portfolio:

<TABLE>
<CAPTION>

                                  March 31, 1995         September 30, 1994
                              ----------------------   ----------------------
                               Number of    Carrying    Number of    Carrying
Type of Underlying Security   Investments    Amount    Investments    Amount
- - ---------------------------   -----------   --------   -----------   --------
                                          ($ Amounts in Thousands)

<S>                               <C>       <C>           <C>        <C>

Apartments                         1         $   235        1        $   254
Residential/Condominium*           8           1,218        9          1,334
Office Buildings                   3          18,181        2          1,699
Industrial Buildings               8          11,203        7         30,328
Research & Development             1          12,043        3         16,371
Retail Buildings                   3          13,011        4         16,276
Hotel/Motels                       1           3,060        1          3,060
                                  --         -------       --        -------

Total                             25         $58,951       27        $69,322
                                  ==         =======       ==        =======
_____________

<FN>

*   Includes 79 mortgage end loans on 8 investments at March 31, 1995 and 80
    mortgage end loans on 9 investments at September 30, 1994.

</TABLE>

          The Trust's mortgage loan portfolio consists of loans located
          principally in California, 49% and Pennsylvania, 23%.

          At March 31, 1995, the Trust had undisbursed commitments of
          $690,000, all of which represents additional advances on partially
          funded mortgage loans.
 
          As of March 31, 1995, there was one earning loan totalling
          $16,608,000 that was delinquent (more than 60 days past due) as to
          principal.

          At March 31, 1995 and 1994, loans totalling $18,438,000 and
          $31,019,000, 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 for the
          quarter ended March 31, 1995.


                                         10



                      MORTGAGE AND REALTY TRUST                       FORM 10Q


Item 1.   Financial Statements (Continued)

NOTES TO THE FINANCIAL STATEMENTS

NOTE 3.   MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (Continued)

          The following table summarizes the Trust's investment in in-substance
          foreclosures:

<TABLE>
<CAPTION>
 
                                   March 31, 1995         September 30, 1994
                               ----------------------    ----------------------
                                Number of    Carrying     Number of    Carrying
Type of Property               Investments    Amount     Investments    Amount
- - ----------------               -----------   --------    -----------   --------
                                          ($ Amounts in Thousands)

<S>                                <C>       <C>             <C>       <C>

EARNING:
Office Buildings                    1        $ 4,654          2        $12,840
Retail Buildings                    2         13,800          3         28,452
Apartments                          -              -          1          6,695
Research & Development Bldgs.       -              -          2         14,110
Industrial Buildings                2         11,874          -              -
                                   --        -------         --        -------
  Total Earning                     5         30,328          8         62,097
                                   --        -------         --        -------

NON-EARNING:
Industrial Buildings                4         18,018          2         10,198
                                   --        -------         --        -------
  Total Non-Earning                 4         18,018          2         10,198
                                   --        -------         --        -------

Total                               9        $48,346         10        $72,295
                                   ==        =======         ==        =======

</TABLE>

          The following table summarizes the Trust's investment in real estate
          equities, net of accumulated depreciation of $11,294,000 at March
          31, 1995 and $10,023,000 at September 30, 1994:

<TABLE>
<CAPTION>

                                   March 31, 1995          September 30, 1994
                               ----------------------    ----------------------
                                Number of    Carrying     Number of    Carrying
Type of Property               Investments    Amount     Investments    Amount
- - ----------------               -----------   --------    -----------   --------
                                          ($ Amounts in Thousands)

<S>                                <C>       <C>             <C>       <C>

Office Buildings                    4        $26,576          4        $26,264
Industrial Buildings                1          6,434          1          6,510
Retail Buildings                    1         23,930          1         24,083
                                   --        -------         --        -------

Total                               6        $56,940          6        $56,857
                                   ==        =======         ==        =======

</TABLE>


                                         11



                       MORTGAGE AND REALTY TRUST                       FORM 10Q
Item 1.   Financial Statements (Continued)

NOTES TO THE FINANCIAL STATEMENTS

NOTE 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 $10,180,000 at March 31, 1995 and $8,329,000 at
          September 30, 1994:

<TABLE>
<CAPTION>

                                   March 31, 1995          September 30, 1994
                               ----------------------    ----------------------
                                Number of    Carrying     Number of    Carrying
Type of Property               Investments    Amount     Investments    Amount
- - ----------------               -----------   --------    -----------   --------
                                          ($ Amounts in Thousands)

<S>                                <C>       <C>            <C>      <C>

EARNING
Apartments                          3        $ 20,924         3       $ 21,012
Office Buildings                    3          14,772         4         13,942
Industrial Buildings                6          23,280         5         19,913
Retail Buildings                    1           7,651         1          7,585
Research & Development Bldgs.       2           6,015         2          5,985
                                   --        --------        --       --------
  Total Earning                    15          72,642        15         68,437
                                   --        --------        --       --------
NON-EARNING
Office Buildings                    4          12,754         5         16,449
Industrial Buildings                5          14,116         4         10,794
Retail Buildings                    1           7,547         2          5,039
                                   --        --------        --       --------
   Total Non-Earning               10          34,417        11         32,282
                                   --        --------        --       --------

Total                              25        $107,059        26       $100,719
                                   ==        ========        ==       ========

</TABLE>

          The following table summarized the Trust's investment in partnerships,
          net of accumulated depreciation of $618,120 at March 31, 1995 and
          $313,628 at September 30, 1994:

<TABLE>
<CAPTION>

                                   March 31, 1995          September 30, 1994
                               ----------------------    ----------------------
                                Number of    Carrying     Number of    Carrying
Type of Property               Investments    Amount     Investments    Amount
- - ----------------               -----------   --------    -----------   --------
                                          ($ Amounts in Thousands)

<S>                                <C>       <C>            <C>        <C>

Industrial Buildings                2        $ 9,403         2         $ 9,524
Retail Buildings                    2         17,108         -            -
                                   --        -------        --         -------

Total                               4        $26,511         2         $ 9,524
                                   ==        =======        ==         =======

</TABLE>

                                      12



                       MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.   Financial Statements (Continued)

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4.   ALLOWANCE FOR LOSSES

          The changes in the allowance for losses for the six months ended
          March 31, 1995 and 1994 were as follows:

<TABLE>
<CAPTION>
                                                      3/31/95        3/31/94
                                                     --------       --------
                                                      (Amounts in Thousands)

<S>                                                  <C>            <C>

Balance at beginning of period                       $13,430        $11,808
Provisions charged to expense                          3,000              -
                                                     -------        -------
                                                      16,430         11,808
Less charges against allowance, net of recoveries      5,399            758
                                                     -------        -------

Balance at end of period                             $11,031        $11,050
                                                     =======        =======

</TABLE>
          Approximately $7,205,000 and $6,524,000 of the allowance at March
          31, 1995 and 1994, respectively, are applicable to properties
          acquired through foreclosure and held for sale.


NOTE 5.   SENIOR NOTES

          SENIOR SECURED NOTES - The lack of liquidity in many of the commercial
          real estate markets continued during the past year.  Although the
          Trust was able to meet the required principal payment at December 31,
          1992, reducing the principal balance of the Senior Notes to $290 
          million, it did not have sufficient funds to meet the $20 million
          required principal payment due June 30, 1993 or the $33.8 million
          required principal payment due December 31, 1993 or the $30 million
          required principal payment due June 30, 1994 or the $18.8 million
          required principal payment due December 31, 1994 (taking into account
          permitted deferrals).  The Trust also did not make the $6.6 million,
          the $6.4 million, the $7.2 million, the $8.7 million, the $9.1
          million and the $9.6 million interest payments due December 31, 1993,
          March 31, 1994, June 30, 1994, September 30, 1994, December 31, 1994,
          and March 31, 1995, respectively.  The average borrowing rates for
          the six months ended March 31, 1995 and 1994, respectively, were
          12.97% and 10.01%.  At March 31, 1995, the outstanding 13.62%
          interest rate on the Senior Notes was composed of interest at 13.00%
          on $200 million of Senior Notes (including default interest at 1%)
          and 15.00% on $90 million of deferred amounts of Senior Notes
          (including default interest at 1%).

          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 fully funded construction borrowing commitment of
          $17.6 million outstanding at March 31, 1995.  The contractual
          interest rate on this loan is 11% (Prime + 2%, floor of 8.5%), and
          the loan matures on July 3, 1995.

          The Trust can further extend the loan to April 22, 1996, but will be
          required to make a $3.6 million payment in order to receive the
          additional extension.


                                       13



                      MORTGAGE AND REALTY TRUST                       FORM 10Q

Item 1.   Financial Statements (Continued)

NOTES TO THE FINANCIAL STATEMENTS

NOTE 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 that
          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 March 31,
          1995 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.

          The estimated fair values of the Trust's financial instruments at
          March 31, 1995 are as follows:

<TABLE>
<CAPTION>
                                                     Carrying         Fair
                                                      Amount         Value
                                                     --------       --------
                                                      (Amounts in Thousands)

<S>                                                  <C>            <C>

FINANCIAL ASSETS:
  Cash and cash equivalents                          $73,140        $73,140
  Mortgage loans and notes receivable (net
    of allowance for possible losses)                 59,744         59,744

FINANCIAL LIABILITIES:
  Loan on equity investment                          (17,593)       (17,593)
  Off-Balance Sheet Financial Instruments:
    Unfunded loan commitments                              -           (690)


</TABLE>


                                        14


                      MORTGAGE AND REALTY TRUST                       FORM 10Q


Item 1.   Financial Statements (Continued)


NOTES TO THE FINANCIAL STATEMENTS


NOTE 7.   SHARE OPTION PLAN

          On August 14, 1994, the 1984 Share Option Plan terminated.  As of
          March 31, 1995, options to purchase 348,500 Common Shares were
          outstanding under the 1984 Share Option Plan.  The exercise price
          per share varies from $2.50 to $4.15.  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.  Options to purchase 77,500 Common Shares at a price
          of $14.50 terminated during the six months ended March 31, 1995.

          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 six months ended March 31, 1995,
          no Options were exercised.



NOTE 8.   EMPLOYEE RETENTION PLAN

          The Trust established an Employee Retention Plan, to be administered
          by the Compensation and Nominating Committee (the "Committee"), in
          order to assure the continuity and performance of employees of the
          Trust.  The Plan contains four categories of benefits: an incentive
          program, stock options, termination pay and a retention bonus.

          The Committee established an incentive program for calendar year 1991.
          The incentive pool was calculated based on the reduction of the
          Trust's outstanding debt (the Senior Notes).  During the six month
          periods ended March 31, 1995 and 1994, the Committee approved the
          payment of discretionary bonuses totalling $128,500 and $123,000,
          respectively, for certain officers and employees of the Trust.

          On March 29, 1991, the Committee awarded stock options for the
          purchase of 197,500 Common Shares at an option price of $4.15.  The
          options 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 $1.3 million and
          the cost is charged to expense at date of termination (as defined in
          the termination pay plan).

          The retention bonus, which totalled $350,000, was paid on February 28,
          1992 to certain employees who remained with the Trust one year after
          the Effective Date of the 1991 Plan (February 27, 1991).


                                     15



                      MORTGAGE AND REALTY TRUST                       FORM 10Q


Item 1.   Financial Statements (Continued)


NOTES TO THE FINANCIAL STATEMENTS


NOTE 9.   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.



                                     16




                           MORTGAGE AND REALTY TRUST                   FORM 10Q


Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS


LIQUIDITY AND CAPITAL RESOURCES - A Plan of Reorganization under Chapter 11 of
the Bankruptcy Code 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.

For the six months ended March 31, 1995, cash provided by operating activities
increased the cash balance by approximately $10.4 million.  This was due
primarily to an increase in interest payable due to no payment of interest on
the Secured Notes since September 30, 1993.  Cash provided by investing
activities increased the cash balance by approximately $2.4 million.  This was
due to higher repayments, net of advances, on: (1) mortgage loans of $835,000,
and (2) in-substance foreclosures of $7.5 million.  Offsetting these increases
were advances, net of repayments, on: (1) properties acquired through
foreclosure of $2.8 million, (2) real estate equities of $1.3 million and (3)
investment in partnerships of $1.8 million.

Due to the lack of liquidity that has existed in the real estate marketplace,
the Trust has not been able to meet payment and other obligations on its
outstanding debt.

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 209% at December 31, 1994 and March 31, 1995, 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, 117% at June 30, 1994 and September 30, 1994 and 120% at
December 31, 1994 and March 31, 1995.  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.

Outstanding Securities refers to all $290 million of securities governed by and
registered under the Indenture dated July 15, 1992 for the Senior Secured
Uncertificated Notes due 1995.  Capital Base means the amount equal to the
Company's Shareholders' Equity less 50% of the non-earning assets.  Non-Earning
Assets means the aggregate of non-earning loans (as defined in the Indenture)
and non-earning properties (properties that do not produce and maintain an
annualized return of 5% or greater cash flow yield).  Earning Assets means an
amount equal to between the aggregate amount of invested assets and aggregate
amount of non-earning assets.

Management has held 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 to be effected through a prepackaged chapter 11
bankruptcy.  In April 1995, the Trust and certain holders of Senior Notes
executed an agreement of understanding, pursuant to which such noteholders
agreed to support the proposed restructuring.  On April 11, 1995, pursuant to
such agreement, the Trust advanced $25 million towards the $50 million minimum
payment required to implement the proposed restructuring.  See Note 1, "Basis 

                                     17


                           MORTGAGE AND REALTY TRUST                   FORM 10Q

Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (Continued)

of Financial Information and Plan of Reorganization".  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.

At March 31, 1995, the Trust had cash and cash equivalents of $71.6 million. 
Included in cash and cash equivalents are $1.3 million of restricted cash which
represents the funding of the employee retention plan and $1.1 million related
to borrowers' deposits.  The Trust's unfunded loan commitments totalled
$690,000 at March 31, 1995.


RESULTS OF OPERATIONS-SIX MONTHS ENDED MARCH 31, 1995 VS. SIX MONTHS ENDED
MARCH 31, 1994 - Net loss for the six months ended March 31, 1995 was
$(15,717,000) or $(1.40) per share compared to a net loss of $(9,808,000) or
$(.87) per share for the six months ended March 31, 1994.  The six months ended
March 31, 1995 included a provision for losses of $3,000,000 or $.27 per share
compared to no provision for the six months ended March 31, 1994.  The Trust's
spread (interest income on mortgage loans plus net operating income from real
estate owned less interest expense) decreased from $(3,212,000) for the six
months ended March 31, 1994 to $(7,439,000) for the six months ended March 31,
1995.  Offsetting these decreases was an increase in interest income on short-
term investments which was $1,864,000 for the six months ended March 31, 1995
compared to $234,000 for the six months ended March 31, 1994.

Interest and fee income on mortgage loans decreased $2,485,000 to $5,181,000
for the six months ended March 31, 1995 from $7,666,000 for the six months
ended March 31, 1994.  The decrease was due primarily to a reduction in earning
mortgage loans (including earning in-substance foreclosures) which totalled
$89.2 million at March 31, 1995 compared to $149.9 million at March 31, 1994. 
During the six months ended March 31, 1995, there were two mortgage loans
totalling $15.4 million that were transferred into investment in Partnerships. 
In addition, advances of $1.8 million on investment in partnerships were made
during the period.

During the six months ended March 31, 1995, no advances were made on mortgage
loans.  Prepayment on mortgage loans of approximately $6 million were received
during the six months ended March 31, 1994.  There were no prepayments on
mortgage loans received during the six months ended March 31, 1995.  The
average interest rate on mortgage loans for the six months ended March 31, 1995
was 7.90% compared to 7.58% for the six months ended March 31, 1994.



                                      18



                           MORTGAGE AND REALTY TRUST                   FORM 10Q


Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (Continued)

Rental income increased $3,048,000 to $11,517,000 in the six months ended March
31, 1995 from $8,469,000 for the six months ended March 31, 1994.  In addition
to rental income, the Trust received reimbursement of certain operating
expenses totalling $1,167,000 and $849,000 for the six months ended March 31,
1995 and 1994, respectively.  Operating expenses and depreciation and
amortization on rental properties increased $1,391,000 to $8,958,000 for the
six months ended March 31, 1995 from $7,567,000 for the six months ended March
31, 1994, primarily from continued growth in real estate equities and
properties acquired through foreclosure and held for sale.

Interest on short-term investments increased due to the continuing accumulation
of available cash.  Available cash increased due to no payment of principal and
interest on the Secured Notes since September 30, 1993.

Interest expense increased $4,370,000 to $19,832,000 in the current period from
$15,462,000 for the six months ended March 31 1994.  This was due primarily to
an increase in the average borrowing rate from 10.01% for the six months ended
March 31, 1994 to 12.97% for the six months ended March 31, 1995.

Other operating expenses decreased $430,000 to $2,198,000 for the six months
ended March 31, 1995 from $2,628,000 for the six months ended March 31, 1994. 
The decrease was due to decreases in professional fees and expenses, insurance
costs, Trustees expenses and tax (other than income).

Reorganization expenses related to the Chapter 11 filing and debt restructuring
expenses were $1,505,000 for the six months ended March 31, 1995 compared to
$1,417,000 for the six months ended March 31, 1994.  These expenses reflect
professional fees incurred by the representatives of the creditors,
shareholders and the Trust.


RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1995 VS. QUARTER ENDED DECEMBER
31, 1994 - Net loss for the quarter ended March 31, 1995 was $(10,263,000) or
$(.91) per share compared to $(5,454,000) or $(.49) per share for the quarter
ended December 31, 1994.  The quarter ended March 31, 1995 included a
provisions for losses of $3,000,000 or $.27 per share compared to no provision
for the quarter ended December 31, 1994.

Interest and fee income on mortgage loans decreased $575,000 to $2,303,000 for
the quarter ended March 31, 1995 from $2,878,000 for the quarter ended December
31, 1994.  The decrease was due to a reduction in earning mortgage loans
(including earning in-substance foreclosures) because of: (1) the repayment of
approximately $6.6 million on earning in-substance foreclosures; (2) the
transfer of approximately $8.3 million of earning in-substance foreclosures to
properties acquired through foreclosure and held for sale; and (3) the
reclassification of approximately $8.7 million from earning to non-earning in-
substance foreclosures.

Rental income increased $133,000 to $5,825,000 in the quarter ended March 31,
1995 from $5,692,000 for the quarter ended December 31, 1994.  In addition to
rental income, the Trust received reimbursement of certain operating expenses
totalling $590,000 and $577,000 for the quarters ended March 31, 1995 and
December 31, 1994, respectively.  Operating expenses and depreciation and
amortization on rental properties increased $210,000 to $4,584,000 for the
quarter ended March 31, 1995 from $4,374,000 for the quarter ended December 31,
1994, primarily from continued growth in real estate equities and properties
acquired through foreclosure and held for sale.

Interest on short-term investments increased due to continuing accumulation of
available cash.


                                      19



                           MORTGAGE AND REALTY TRUST                   FORM 10Q


Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (Continued)

Interest expense increased $714,000 to $10,273,000 in the current quarter from
$9,559,000 for the quarter ended December 31, 1994.  This was due primarily to
an increase in the average borrowing rate from 12.50% for the quarter ended
December 31, 1994 to 13.45% for the quarter ended March 31, 1995.

Reorganization expenses related to the Chapter 11 filing and debt restructuring
expenses were $1,135,000 for the quarter ended March 31, 1995 compared to
$370,000 for the quarter ended December 31, 1994.  These expenses reflect
professional fees incurred by the representatives of the creditors,
shareholders and the Trust.


RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1995 VS. QUARTER ENDED MARCH
31, 1994 - Net loss for the quarter ended March 31, 1995 was $(10,263,000) or
$(.91) per share compared to $(5,152,000) or $(.46) per share for the quarter
ended March 31, 1994.  The quarter ended March 31, 1995 included a provision
for losses of $3,000,000 or $.27 per share compared to no provision for the
quarter ended March 31, 1994.

Interest and fee income on mortgage loans decreased $1,358,000 to $2,303,000
for the quarter ended March 31, 1995 compared to $3,661,000 for the quarter
ended March 31, 1994.  The decrease was due primarily to a reduction in earning
mortgage loans (including earning in-substance foreclosures) which totalled
$149.9 million at March 31, 1994 compared to $89.3 million at March 31, 1995.

Rental income increased $1,658,000 to $5,825,000 in the quarter March 31, 1995
from $4,167,000 for the quarter ended March 31, 1994.  In addition to rental
income, the Trust received reimbursement of certain operating expenses
totalling $590,000 and $418,000 for the quarters ended March 31, 1995 and 1994,
respectively.  Operating expenses and depreciation and amortization on rental
properties increased $798,000 to $4,584,000 for the quarter ended March 31,
1995 from $3,786,000 for the quarter ended March 31, 1994, primarily from
continued growth in real estate equities and properties acquired through
foreclosure and held for sale.

Interest on short-term investments increased due to the continuing accumulation
of available cash.

Interest expense increased $2,610,000 to $10,273,000 for the current quarter
compared to $7,663,000 for the quarter ended March 31, 1994.  This increase was
due primarily to an increase in the average borrowing rate from 10.15% for the
quarter ended March 31, 1994 to 13.45% for the quarter ended March 31, 1995.

Reorganization expenses related to the Chapter 11 filing and debt restructuring
expenses were $1,135,000 for the quarter ended March 31, 1995 compared to
$741,000 for the quarter ended March 31, 1994.  These expenses reflect
professional fees incurred by the representatives of the creditors,
shareholders and the Trust.


NON-EARNING LOANS AND INVESTMENTS - At March 31, 1995, the Trust's non-
earning loans, non-earning in-substance foreclosures and non-earning properties
acquired through foreclosure and held for sale were $52,460,000, representing
17.58% of invested assets compared to $47,008,000 (15.25%) at December 31, 1994
and $44,909,000 (13.71%) at March 31, 1994.


                                      20


                          MORTGAGE AND REALTY TRUST                    FORM 10Q

                                   PART II


Item 3.   DEFAULTS UPON SENIOR SECURITIES

          The Trust did not make a $9.6 million interest payment due March 31,
          1995 on the Senior Notes.

          In addition, based on financial results at March 31, 1995 the Trust
          was in violation of certain financial covenants in the Indenture
          relating to the ratio of outstanding securities to the Trust's
          capital base and the ratio of earning assets to outstanding
          securities.  Outstanding Securities refers to all Securities
          governed by and registered under the Indenture dated July 15, 1992
          for the Senior Secured Uncertificated Notes due 1995.  Capital Base
          means the amount equal to the Company's Shareholders' Equity less
          50% of the non-earning assets.  Non-Earning Assets means the
          aggregate of non-earning loans (as defined in the Indenture) and
          non-earning properties (properties that do not produce and maintain
          an annualized return of 5% or greater cash flow yield).  Earning
          Assets means an amount equal to between the aggregate amount of
          invested assets and aggregate amount of non-earning assets.  Under
          the financial covenants of the Indenture, the Trust was required to
          maintain a ratio of outstanding indenture securities to its capital
          base (as defined in the Indenture) of 209% at March 31, 1995 and a
          ratio of earning assets to outstanding securities of 120% at March
          31, 1995.  Failure to satisfy these covenants constitute additional
          events of default under the Indenture.  In addition, at December 31,
          1994, the Trust's non-performing assets (as defined in the Indenture)
          exceeded the limits prescribed in the Indenture.  In addition to
          constituting an event of default, the Trust is obligated under the
          Indenture to pay to the holders of Senior Notes a penalty equal to
          1.5% of the excess of non-performing assets, or a payment of
          approximately $183,000.  The are also outstanding certain other
          events of default under the Indenture.

          Notwithstanding the uncured events of default, neither the Indenture
          Trustee nor any holders of the Senior Notes have accelerated the
          Senior Notes.  On July 2, 1993 holders of approximately 81% of the
          Senior Notes agreed, subject to certain conditions, not to accelerate
          the Senior Notes or take any other remedial or enforcement action
          during a defined standstill period (the "Standstill Period")
          initially expiring July 31, 1993.  The Standstill Period was extended
          by holders of more than 66-2/3% of the Senior Notes on August 3,
          August 20, September 23, October 5 and November 23, 1993.  However,
          the Standstill Period expired on December 3, 1993.  At the present
          time, it appears unlikely that any further extensions of the
          Standstill Period will be granted.  Subsequent to the expiration of
          the Standstill Period, on or about December 8, 1993 the Indenture
          Trustee (and the Collateral Agents) notified the Trust's bank of the
          Indenture Trustee's security interest in the Trust's deposit accounts
          and instructed the bank to freeze the Trust's cash until otherwise
          instructed by the Indenture Trustee.  Since that date, the Trust has
          operated on an ad hoc basis with the Indenture Trustee in
          administering its cash, with all cash use subject to review and
          approval by the Indenture Trustee.  On or about February 3, 1994, the
          Trust and the Indenture Trustee and Collateral Agents reached further
          understanding regarding the Trust's use of cash and administration 
          of its assets in the absence of a continued or extended Standstill


                                      21


                          MORTGAGE AND REALTY TRUST                    FORM 10Q

                                   PART II



Item 3.   DEFAULTS UPON SENIOR SECURITIES (Continued)


          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 or Collateral Agent approval, and the Trust will administer
          its assets as if no default had occurred and was continuing.  There
          can be no assurance that the Indenture Trustee will not terminate the
          understanding or take further remedial or enforcement action with
          respect to the Trust's bank accounts or other properties, including
          acceleration of the Senior Notes and foreclosure.  Such action, or
          failure of the Indenture Trustee and the Collateral Agents to consent
          to necessary use of cash or releases of collateral in the conduct of
          the Trust's business, would have a material adverse effect on the
          Trust's operations and could cause the Trust to seek relief under
          Chapter 11 of the United States Bankruptcy Code.




Item 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (A)  EXHIBITS

               Exhibits are as set forth in the "INDEX TO EXHIBITS" on page 24.
          

          (B)  REPORTS ON FORM 8-K

               None



                                       22




                         MORTGAGE AND REALTY TRUST                     FORM 10Q


                                 SIGNATURES






        Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.




                                        MORTGAGE AND REALTY TRUST




                                        By   /s/ Victor H. Schlesinger       

                                            -------------------------------
                                             Victor H. Schlesinger
                                             Chairman


                                        By   /s/ Daniel F. Hennessey       
                                            -------------------------------
                                             Daniel F. Hennessey
                                             Treasurer
                                             Principal Financial Officer


DATE:   May 12, 1995



                                      23



                         MORTGAGE AND REALTY TRUST                     FORM 10Q


                             INDEX TO EXHIBITS



EXHIBIT
  NO.                              DESCRIPTION
- - -------                            -----------

  11*         Schedule of Net Income (Loss) Per Share - Assuming Full Dilution




- - ------------------
*  Exhibit filed with this Form 10-Q.




                                     24


<PAGE>
 



                                                                     Exhibit 11 

                         MORTGAGE AND REALTY TRUST
       SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION

                     FOR THE PERIODS ENDED MARCH 31, 1995

<TABLE>
<CAPTION>

                                              Quarter            Six Months
                                               Ended               Ended
                                           ------------        -------------

<S>                                        <C>                 <C>
BASIS:

Net (loss)                                 $(10,263,000)       $(15,717,000)
Average common shares outstanding            11,226,000          11,226,000
20% limitation on assumed repurchase          2,245,000           2,245,000

Market price at the end of the period              $.25                $.25

Options outstanding                             348,500             348,500


COMPUTATION:

Proceeds:
  Options                                       348,500             348,500
  Average exercise price                    X     $3.35         X     $3.35
                                            -----------         -----------
                                            $ 1,167,000         $ 1,167,000
                                            ===========         ===========
Adjustment of proceeds:
  Purchase of outstanding common shares
   at market value                          $   561,000         $   561,000
   Retirement of debt                           606,000             606,000
                                            -----------         -----------
                                            $ 1,167,000         $ 1,167,000
                                            ===========         ===========
Adjustment of net income (loss):
  Net (loss) before gain on sales of
   real estate                             $(10,263,000)       $(15,717,000)
  Interest reduction                             20,000              40,000
                                           ------------        ------------
      Adjusted net income (loss)           $(10,243,000)       $(15,677,000)
                                           ============        ============
Adjustment of shares outstanding:
  Average shares outstanding                 11,226,000          11,226,000
  Net shares repurchased                     (1,897,000)         (1,897,000)
                                            -----------         -----------
Adjusted shares outstanding (basis for
  computation of net income per share -
  assuming full dilution)                     9,329,000           9,329,000
                                            ===========         ===========
Fully diluted earnings per share:

  Net (loss)                                     $(1.10)            $(1.68)
                                                 ======             ====== 

</TABLE>


NOTE - Primary earnings per share is based on the average number of shares
outstanding during the period.


                                                                     Exhibit 11 

                         MORTGAGE AND REALTY TRUST

       SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION

                     FOR THE PERIODS ENDED MARCH 31, 1994

<TABLE>
<CAPTION>

                                              Quarter            Six Months
                                               Ended                Ended
                                            ------------        ------------

<S>                                         <C>                 <C>
BASIS:

Net (loss)                                  $(5,152,000)        $(9,808,000)
Average common shares outstanding            11,226,000          11,226,000
20% limitation on assumed repurchase          2,245,000           2,245,000

Market price at the end of the period              $.50                $.50

Options outstanding                             426,000             426,000

COMPUTATION:

Proceeds:
  Options                                       426,000             426,000
  Average exercise price                    X     $5.37         X     $5.37
                                            -----------         -----------
                                            $ 2,288,000         $ 2,288,000
                                            ===========         ===========

Adjustment of proceeds:
  Purchase of outstanding common shares
   at market value                          $ 1,123,000         $ 1,123,000
   Retirement of debt                         1,165,000           1,165,000
                                            -----------         -----------
                                            $ 2,288,000         $ 2,288,000
                                            ===========         ===========
Adjustment of net income (loss):
  Net (loss) before gain on sales of
   real estate                              $(5,152,000)        $(9,808,000)
  Interest reduction                             29,000              58,000
                                            -----------         -----------

      Adjusted net income (loss)            $(5,123,000)        $(9,750,000)
                                            ===========         ===========
Adjustment of shares outstanding:
  Average shares outstanding                 11,226,000          11,226,000
  Net shares repurchased                     (1,819,000)         (1,819,000)
                                            -----------         -----------
Adjusted shares outstanding (basis for
  computation of net income per share -
  assuming full dilution)                     9,407,000           9,407,000
                                            ===========         ===========

Fully diluted earnings per share:

  Net (loss)                                      $(.54)            $(1.04)
                                                  =====             ====== 

</TABLE>


NOTE - Primary earnings per share is based on the average number of shares
outstanding during the period.

<PAGE>
 
    Important: A bankruptcy case has not been commenced as of the date of 
                                 this document


                           MORTGAGE AND REALTY TRUST
                                 MASTER BALLOT
                           FOR ACCEPTING OR REJECTING
      THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST

                             CLASS 5: COMMON SHARES


- --------------------------------------------------------------------------------
 THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
     MIDNIGHT, NEW YORK CITY TIME, ON ______, 1995 UNLESS EXTENDED.
- --------------------------------------------------------------------------------

          This Master Ballot is submitted to you to solicit and obtain the vote
of the beneficial owners of the securities described below to accept or reject
the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated _________, 1995 (the "Proxy").  The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code.  At this time, the Trust has not
commenced a chapter 11 case.  If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.

PLEASE READ THE VOTING INFORMATION AND INSTRUCTIONS ON THE REVERSE SIDE BEFORE
COMPLETING THIS MASTER BALLOT.

          ITEM 1.    TABULATION OF BENEFICIAL CLASS 5 VOTING.  The undersigned
certifies that _______________ beneficial owners of _________________ in number
of shares of Common Shares, par value $1.00 per share (the "Common Shares"),
have delivered ballots to the undersigned voting Class 5 equity interests to
ACCEPT the Prepackaged Plan.

          The undersigned certifies that ____________ beneficial owners of
_______________ in number of Common Shares have delivered ballots to the
undersigned voting Class 5 equity interests to REJECT the Prepackaged Plan.

          ITEM 2.  RELEASES.  The undersigned certifies that ___________
beneficial owners of ______ in number of Common Shares have delivered ballots to
the undersigned voting Class 5 equity interests to NOT CONSENT to the mutual
release (the "Release") provided in Section 5.13 of the Prepackaged Plan.

          The undersigned certifies that ____________ beneficial owners of
______ in number of Common Shares have delivered ballots to the undersigned
voting Class 5 equity interests to CONSENT to the Release provided in Section
5.13 of the Prepackaged Plan.

          ITEM 3.  CLASS 5 BENEFICIAL OWNER INFORMATION.  The undersigned
certifies that listed below (or attached hereto) is a true and accurate schedule
of the beneficial owners of Common Shares, that have delivered ballots to the
undersigned voting Class 5 equity interests to accept or reject the Prepackaged
Plan and to consent or not consent to the Release.
 
(Please complete the following table or attach the information requested by this
Item 3 in the following format:)
<TABLE> 
<CAPTION> 
YOUR CUSTOMER ACCOUNT NUMBER(S)                              TO ACCEPT THE       TO REJECT THE      TO CONSENT       TO NOT CONSENT
   FOR EACH BENEFICIAL OWNER      NUMBER OF COMMON SHARES   PREPACKAGED PLAN    PREPACKAGED PLAN   TO THE RELEASE    TO THE RELEASE
- -------------------------------   -----------------------   -----------------   ----------------   --------------    --------------
<S>                               <C>                       <C>                 <C>                <C>               <C>
1.  _________________________     _______________________       ____________       ____________       ___________     ___________
2.  _________________________     _______________________       ____________       ____________       ___________     ___________
3.  _________________________     _______________________       ____________       ____________       ___________     ___________
4.  _________________________     _______________________       ____________       ____________       ___________     ___________
5.  _________________________     _______________________       ____________       ____________       ___________     ___________
6.  _________________________     _______________________       ____________       ____________       ___________     ___________
7.  _________________________     _______________________       ____________       ____________       ___________     ___________
</TABLE> 
<PAGE>
 
<TABLE> 
<S>                               <C>                       <C>                 <C>                <C>               <C>
8.  _________________________     _______________________       ____________       ____________       ___________     ___________
9.  _________________________     _______________________       ____________       ____________       ___________     ___________
10. _________________________     _______________________       ____________       ____________       ___________     ___________
</TABLE>

          ITEM 4.  The undersigned certifies that the undersigned is an agent of
the registered owner with full power and authority to execute this document in
its own name or through a position held at a securities depository of the Common
Shares set forth in Item 1.  The undersigned further certifies that none of the
Common Share accounts identified in Item 3 above have previously been voted by
any other Master Ballot, except to the extent provided in Item 5 of the Voting
Information and Instructions attached hereto, submitted by the undersigned.  The
undersigned also acknowledges the terms and conditions set forth in the Proxy.
<TABLE> 
<C>                                        <C> 
DATED:
___________________________________        _________________________________________
(Print or type name)                        (If by Authorized Agent, Name and Title)

__________________________________         _________________________________________
(Signature)                                            (Address (Street)

______________________________________     _________________________________________
(Name of broker, bank or other nominee)              (City, State, Zip Code)
</TABLE> 

     Return this Master Ballot before ________, 1995 by mail to Mortgage and
Realty Trust at 8380 Old York Road, Suite 300, Elkins Park, PA 19027, Attention:
Daniel F. Hennessey.
 
                                      -2-
<PAGE>
 
                      VOTING INFORMATION AND INSTRUCTIONS
                        FOR COMPLETING THE MASTER BALLOT

1.   The Master Ballot is to be used by brokerage firms, banks or proxy
     intermediaries for summarizing votes cast by beneficial owners of the
     securities in Class 5 to accept or reject the Prepackaged Plan.

2.   MASTER BALLOTS MUST BE RECEIVED BY THE TRUST, AT THE ADDRESS INDICATED
     ABOVE ON THIS MASTER BALLOT BY MIDNIGHT, NEW YORK TIME, ON
     __________________, 1995 (THE "EXPIRATION DATE").  MASTER BALLOTS NOT
     RECEIVED BY THE EXPIRATION DATE WILL NOT BE COUNTED.

3.   THE MASTER BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR
     ANY PURPOSE OTHER THAN TO TRANSMIT VOTES TO ACCEPT OR REJECT THE
     PREPACKAGED PLAN.  HOLDERS SHOULD NOT SURRENDER CERTIFICATES REPRESENTING
     THEIR SECURITIES AT THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF
     ANY SUCH CERTIFICATES TRANSMITTED TOGETHER WITH A MASTER BALLOT.  SURRENDER
     OF SECURITIES FOR EXCHANGE PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE
     ONLY PURSUANT TO A LETTER OF TRANSMITTAL WHICH WILL BE FURNISHED TO YOU BY
     THE TRUST (OR ITS AGENT) AFTER CONFIRMATION OF THE PREPACKAGED PLAN BY THE
     BANKRUPTCY COURT.

4.   With respect to any individual ballots returned to you by the beneficial
     owner, you must either (a) forward such ballots directly to the Trust
     indicating the appropriate authority to vote on each such ballot submitted
     or (b) complete a Master Ballot summarizing the voting with respect to such
     individual ballots, return the Master Ballot to the Trust, and retain all
     such individual ballots for inspection by the Bankruptcy Court until
     [_____________] 1995.

5.   Multiple Master Ballots may be completed and delivered to the Trust.  Votes
     reflected by multiple Master Ballots will be counted except to the extent
     that they are duplicative of other Master Ballots.  If two or more Master
     Ballots are inconsistent in whole or in part, the latest Master Ballot
     received prior to the Expiration Date will, to the extent of such
     inconsistency, supersede and revoke any prior Master Ballot.  If more than
     one Master Ballot is submitted and the later Master Ballot(s) supplement
     rather than supersede earlier Master Ballot(s), please mark the subsequent
     Master Ballot(s) with the words "Additional Vote" or such other language as
     you customarily use to indicate an additional vote that is not meant to
     revoke an earlier vote.

6.   Item 3 of the Master Ballot requests that you provide information in the
     indicated format for each individual beneficial owner on whose behalf you
     are executing the Master Ballot.  To identify such beneficial owners
     without disclosing their names, please use the customer account number
     assigned by you to each such beneficial owner.  In the event that a single
     customer has more than one account with the identical registration, that
     customer should be listed no more than once in Item 3.  In completing Item
     3, the total number of shares of all accounts voted with respect to a
     single customer should be listed in a single line entry, so that each line
     will represent a different beneficial owner.

7.   Each beneficial owner must vote its entire claim or equity interest within
     a single class under the Prepackaged Plan to either accept or reject the
     Prepackaged Plan.  A beneficial owner may not split its vote within a class
     and, accordingly, an individual ballot (or multiple individual ballots with
     respect to multiple claims or equity interests within a single class)
     received from a beneficial owner that partially rejects and partially
     accepts the Prepackaged Plan should not be counted.  Furthermore, for
     purposes of computing the vote on a Master Ballot, each voting beneficial
     owner should be deemed to have voted the full amount of its holdings
     according to your records as of the close of business on
     ___________________, 1995 (the "Voting Record Date").

8.   No fees or commissions or other remuneration will be payable to any broker,
     dealer or other person in connection with the solicitation by the Trust
     pursuant to the Prepackaged Plan.  The Trust will, however, upon written
     request, reimburse you for customary mailing and handling expenses incurred
     by you in forwarding individual ballots and accompanying solicitation
     packages to your clients.

NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON AS THE AGENT OF THE TRUST, OR AUTHORIZE YOU OR ANY PERSON TO
USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO
THE PREPACKAGED PLAN, EXCEPT FOR THE STATEMENTS CONTAINED IN THE DOCUMENTS
ENCLOSED HEREWITH.

IF YOU HAVE ANY QUESTIONS REGARDING THIS MASTER BALLOT OR THE VOTING PROCEDURES,
OR IF YOU NEED ADDITIONAL COPIES OF THE MASTER BALLOT, INDIVIDUAL BALLOTS OR
SOLICITATION PACKAGES, INCLUDING THE PREPACKAGED PLAN AND THE PROXY, PLEASE CALL
DANIEL F. HENNESSEY, TREASURER OF THE TRUST, AT (215) 881-1525.
<PAGE>
 
                          MORTGAGE AND REALTY TRUST

                               Solicitation of
                         Prepackaged Plan Acceptances

                       Record Date: [__________], 1995
                     Expiration Date: [__________], 1995

To:  Securities Dealers, Brokers, Commercial Banks,
     Trust Companies and Other Nominees

     Mortgage and Realty Trust (the "Trust") is soliciting acceptances (the
"Solicitation") to its prepackaged plan of reorganization (the "Prepackaged
Plan") as set forth in the enclosed Disclosure Statement and Proxy Statement
(the "Proxy") from Holders of Senior Secured Uncertificated Notes due 1995,
Common Shares, Other Secured Claims and Unsecured Claims. Capitalized terms used
herein but not defined have the meanings assigned to them in the Proxy
Statement.

     For the Prepackaged Plan to be confirmed without utilizing the "cramdown"
provisions of Chapter 11 of the Bankruptcy Code as to a class of Claims or
Interest entitled to vote on the Prepackaged Plan, it is necessary for the Trust
to receive acceptances from (i) holders of Claims constituting at least two-
thirds in dollar amount and more than one-half in number of the allowed Claims
in each impaired class voting on the Prepackaged Plan and (ii) holders of at
least two-thirds in amount of outstanding Common Shares in such class voting on
the Prepackaged Plan.

     Enclosed are copies of the following documents:

     1.  The Proxy.

     2.  A form of letter ("To Our Clients") to be sent to your clients for
         whose account you hold Common Shares registered in your name or the
         name of your nominee, with instructions regarding voting on the
         Prepackaged Plan.

     3.  Ballots and Ballot instructions for accepting or rejecting the
         Prepackaged Plan to be sent to your clients for whose account you hold
         Common Shares registered in your name or the name of your nominee.

     4.  Master Ballots and Master Ballot Instructions to be used only by you to
         calculate and report the total number of votes either accepting or
         rejecting the Prepackaged Plan with respect to Common Shares owned by
         beneficial owners for whom you

<PAGE>
 
         serve as nominee and from whom you have received a completed and 
         executed Ballot.

      5. A pre-addressed postage pre-paid business reply envelope to be used
         only by your firm to return Master Ballot(s) to the Trust.

      TO VOTE ON THE PREPACKAGED PLAN. To vote on the Prepackaged Plan pursuant 
to the Solicitation, you must first deliver a Proxy, the appropriate Ballot(s) 
and instructions thereto, a self-addressed postage pre-paid business reply 
envelope, and a "To Our Clients" letter to each of your clients for whose 
account you hold Common Shares. You should affix a label stating, or otherwise 
appropriately indicate at the space provided on each Ballot, the number of 
Common Shares held by such beneficial owner(s) in his, her or its account as of 
the close of business on [               ], 1995 (the "Voting Record Date").

     To vote using the Master Ballot, please: (i) retain the returned, completed
Ballots in your files, (ii) provide appropriate information for each of the
Items on the Master Ballot, in accordance with the instructions thereto, (iii)
sign and date the Master Ballot, (iv) if you are completing the Master Ballot on
behalf of another entity, indicate your relationship with such entity and the
capacity in which you are signing and (v) provide your name and mailing address.

      If the Master Ballot request for account identification number(s) for
individual beneficial owners is applicable, you may identify such beneficial
owners without disclosing their names by using the customer account number
assigned by you to each such beneficial owner or a sequential number assigned by
you to each such beneficial owner, provided that you retain a list of the
number(s) assigned to each such beneficial owner. Retain in your files all
completed Ballots received which are reflected in the Master Ballot.

      Except as provided in the Proxy, the Trust will not pay any fees or 
commissions to any broker or dealer or other person for soliciting acceptances 
to the Prepackaged Plan. You will, however, be reimbursed for customary mailing 
and handling expenses incurred by you in forwarding any of the enclosed 
materials to your clients.

      Failure to follow the above instructions in a timely manner may result in 
your or your client's vote being deemed invalid.

      NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON AS THE AGENT OF THE TRUST OR AUTHORIZE YOU OR ANY PERSON TO 
USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO
THE PREPACKAGED PLAN, EXCEPT FOR THE STATEMENTS CONTAINED IN THE DOCUMENTS 
ENCLOSED HEREIN.

      If you need additional copies of the above materials, or if you have 
questions regarding the Ballots, Master Ballots or Voting Procedures, please 
call Daniel F. Hennessey at the Trust at (215) 881-1525.
<PAGE>
 
                           MORTGAGE AND REALTY TRUST


                                SOLICITATION OF
                          PREPACKAGED PLAN ACCEPTANCES

TO OUR CLIENTS:

     Enclosed for your consideration are a Disclosure Statement and Proxy
Statement dated _____________, 1995 (the "Proxy") and other documents relating
to the restructuring of Mortgage and Realty Trust (the "Trust").  Capitalized
terms used herein but not defined herein shall have the meanings assigned to
them in the Proxy.

     The Trust is soliciting acceptances of its prepackaged plan of
reorganization (the "Prepackaged Plan") from holders of Senior Secured
Uncertificated Notes due 1995, Common Shares, Other Secured Claims and Unsecured
Claims.  For the Prepackaged Plan to be confirmed (without utilizing "cramdown"
provisions of Chapter 11 of the Bankruptcy Code as to a class of Claims or
Interests entitles to vote on the Prepackaged Plan), it must be accepted by the
(i) the holders of Claims constituting at least two-thirds in dollar amount and
more than one-half in number of the allowed Claims in each impaired class voting
on the Prepackaged Plan and (ii) holders of at least two-thirds in amount of
outstanding Common Shares in such class voting on the Prepackaged Plan.

     In addition to the Proxy, enclosed are a Ballot and the instructions
thereto (the "Ballot") for voting to accept or to reject the Prepackaged Plan.

     TO VOTE ON THE PREPACKAGED PLAN:  Review the Proxy, complete the Ballot in
accordance with the instructions thereto and return the completed Ballot to us
for processing.  If neither the "Accepts" nor "Rejects" box on the Ballot is
checked and the Ballot is not signed on the appropriate line(s), the Ballot will
not be counted as having been cast.  Please be sure to return your ballot(s) to
us to allow time for our handling prior to the Expiration Date indicated in the
box below.

- --------------------------------------------------------------------------------
THE SOLICITATION WILL EXPIRE AT MIDNIGHT, NEW YORK TIME, ON _____________, 1995
(THE "EXPIRATION DATE"), UNLESS THE TRUST, IN ITS SOLE DISCRETION, EXTENDS OR 
WAIVES THE PERIOD.
- --------------------------------------------------------------------------------

     We request that you give this matter your immediate attention to ensure
that you have a full opportunity to consider and respond to the Solicitation.

     Except as provided in the Proxy, the Trust will not pay any fees or
commissions to any broker or dealer or other person for soliciting acceptances
to the Prepackaged Plan.

                     YOUR IMMEDIATE ATTENTION IS REQUESTED
<PAGE>
 
             Important:  A bankruptcy case has not been commenced 
                       as of the date of this document.

                           MORTGAGE AND REALTY TRUST

                                     BALLOT

                           FOR ACCEPTING OR REJECTING
      THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST

             CLASS 2:  SENIOR SECURED UNCERTIFICATED NOTES DUE 1995

- --------------------------------------------------------------------------------
     THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
     MIDNIGHT, NEW YORK CITY TIME, ON ___________, 1995, UNLESS EXTENDED.
- --------------------------------------------------------------------------------

     This Ballot is submitted to you to solicit your vote to accept or reject
the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated __________, 1995 (the "Proxy").  The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code.  At this time, the Trust has not
commenced a chapter 11 case.  If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.

     THIS BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY
OTHER PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN.
HOLDERS SHOULD NOT SURRENDER ANY DOCUMENTS REPRESENTING SECURITIES AT THIS TIME,
THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH DOCUMENTS.

     PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE
COMPLETING THIS BALLOT.

- --------------------------------------------------------------------------------
IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT
SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR COUNTED
AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-4.
- --------------------------------------------------------------------------------
 
     ITEM 1. The undersigned, a Holder of a Class 2 Claim as defined in the
Prepackaged Plan, is the beneficial owner of Senior Secured Uncertificated Notes
due 1995, in the unpaid principal amount of: $_________________  (enter amount).
 
     ITEM 2.  VOTE.  The undersigned votes all Class 2 Claims referenced in Item
1 (check one box):
          
          [_] To ACCEPT the Prepackaged Plan  [_] To REJECT the Prepackaged Plan

     ITEM 3.  RELEASE.  Please indicate whether you elect to opt out of the
mutual release provided in Section 5.13 of the Prepackaged Plan by checking the
box below.
 
          [_] The undersigned DOES NOT CONSENT to the mutual release provided
              in Section 5.13 of the Prepackaged Plan.

     ITEM 4.  ACCREDITED INVESTOR.  Please certify that you are an "accredited
investor" with the meaning of Rule 501 under the Securities Act of 1933, as
amended, by checking the box:   [_]

     ITEM 5.   By signing this Ballot, the undersigned certifies that the
undersigned is the beneficial owner(s) of the Senior Secured Uncertificated
Notes due 1995 voted on this Ballot and/or has full power and authority to vote
to accept or reject the Prepackaged Plan.  The undersigned also acknowledges
receipt of the Proxy and other applicable Solicitation Materials as well as all
terms and conditions set forth therein.

     The signature(s) below should conform to the name(s) shown on the
document(s) representing the claims being voted.  Where claims are held in the
names of more than one person, all such owners should sign below.

DATED:

_____________________________________________________
(Signature)

_____________________________________________________
(Signature of Co-Owner, if applicable)

_____________________________________________________
(if by Authorized Agent, Name and Title)
<PAGE>
 
                      VOTING INFORMATION AND INSTRUCTIONS
                           FOR COMPLETING THE BALLOT

1.   FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-4, SIGN AND RETURN
     THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-
     ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE.  YOU WILL FIND THE
     AMOUNT OF YOUR HOLDINGS AS OF THE CLOSE OF BUSINESS ON THE VOTING RECORD
     DATE INDICATED ON THE ADDRESS LABEL AFFIXED TO THE FRONT OF THE BALLOT.
     THAT TOTAL SHOULD BE ENTERED IN ITEM 1.

     If for any reason you did not receive a pre-addressed postage pre-paid
     business reply envelope or if the amount of your holdings indicated on the
     aforementioned label is unclear, please contact Daniel F. Hennessey at the
     telephone number below.

     BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON
     _______________, 1995 (THE "EXPIRATION DATE").  IF A BALLOT IS RECEIVED
     AFTER THE EXPIRATION DATE, IT WILL NOT BE COUNTED.

2.   If you hold claims or equity interests in more than one class under the
     Prepackaged Plan (i.e., common shares and notes), you should receive one
     ballot, coded by class number and one set of solicitation materials for
     each such class of claims or equity interests.  Each ballot you receive
     votes only your claims or equity interests.  Please complete and return
     each ballot you receive.  You must vote ALL of your claims or equity
     interests within a single class under the Prepackaged Plan to either accept
     or reject the Prepackaged Plan.  Accordingly, a ballot that partially
     rejects and partially accepts the Prepackaged Plan will not be counted.

3.   THE BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY OTHER
     PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN.
     HOLDERS SHOULD NOT SURRENDER ANY DOCUMENTS REPRESENTING THEIR SECURITIES AT
     THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH DOCUMENTS
     TRANSMITTED TOGETHER WITH A BALLOT.  SURRENDER OF DOCUMENTS FOR EXCHANGE
     PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE ONLY PURSUANT TO A LETTER OF
     TRANSMITTAL, WHICH WILL BE FURNISHED TO YOU BY THE TRUST (OR ITS AGENT)
     AFTER CONFIRMATION OF THE PREPACKAGED PLAN BY THE BANKRUPTCY COURT.

4.   The ballot is for voting purposes only and does not constitute and shall
     not be deemed a proof of claim or interest or an assertion of a claim or
     interest.

                      PLEASE RETURN YOUR BALLOT PROMPTLY!

                      IF YOU HAVE ANY QUESTIONS REGARDING
                     THIS BALLOT OR THE VOTING PROCEDURES,
                                  PLEASE CALL:


                           MORTGAGE AND REALTY TRUST

                                 (215) 881-1525
<PAGE>
 
  Important:  A bankruptcy case has not been commenced as of the date of this
                                   document.

                           MORTGAGE AND REALTY TRUST

                                     BALLOT

                           FOR ACCEPTING OR REJECTING
      THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST

                         CLASS 3:  OTHER SECURED CLAIMS

- --------------------------------------------------------------------------------
     THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
     MIDNIGHT, NEW YORK CITY TIME, ON ___________, 1995, UNLESS EXTENDED.
- --------------------------------------------------------------------------------

     This Ballot is submitted to you to solicit your vote to accept or reject
the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated __________, 1995 (the "Proxy").  The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code.  At this time, the Trust has not
commenced a chapter 11 case.  If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.

     PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE
COMPLETING THIS BALLOT.

- --------------------------------------------------------------------------------
 IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT
    SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR 
           COUNTED AS HAVING BEEN CAST.  PLEASE COMPLETE ITEMS 1-3.
- --------------------------------------------------------------------------------

     ITEM 1.  The undersigned, a Holder of a Class 3 Claim as defined in the
Prepackaged Plan, is the owner of Other Secured Claims, in the amount of:
$_________________________ (enter amount).

     ITEM 2.  VOTE.  The undersigned votes all Class 3 Claims referenced in Item
1 (check one box):
          [_] To ACCEPT the Prepackaged Plan  [_] To REJECT the Prepackaged Plan

     ITEM 3.  RELEASE.  Please indicate whether you elect to opt out of the
mutual release provided in Section 5.13 of the Prepackaged Plan by checking the
box below.
 
          [_]  The undersigned DOES NOT CONSENT to the mutual release provided
               in Section 5.13 of the Prepackaged Plan.

     ITEM 4.   By signing this Ballot, the undersigned certifies that the
undersigned is the owner(s) of the Other Secured Claims voted on this Ballot
and/or has full power and authority to vote to accept or reject the Prepackaged
Plan.  The undersigned also acknowledges receipt of the Proxy and other
applicable Solicitation Materials as well as all terms and conditions set forth
therein.

     The signature(s) below should conform to the name(s) shown on the
document(s) representing the claims being voted.  Where claims are held in the
names of more than one person, all such owners should sign below.

DATED:

_____________________________________________________
(Signature)

_____________________________________________________
(Signature of Co-Owner, if applicable)

_____________________________________________________
(if by Authorized Agent, Name and Title)
<PAGE>
 
                      VOTING INFORMATION AND INSTRUCTIONS
                           FOR COMPLETING THE BALLOT

1.   FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-3, SIGN AND RETURN
     THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-
     ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE.

     If for any reason you did not receive a pre-addressed postage pre-paid
     business reply envelope or if the amount of your holdings indicated on the
     aforementioned label is unclear, please contact Daniel F. Hennessey at the
     telephone number below.

     BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON
     _______________, 1995 (THE "EXPIRATION DATE").  IF A BALLOT IS RECEIVED
     AFTER THE EXPIRATION DATE, IT WILL NOT BE COUNTED.

2.   If you hold claims or equity interests in more than one class under the
     Prepackaged Plan (i.e., common shares and notes), you should receive one
     ballot, coded by class number and one set of solicitation materials for
     each such class of claims or equity interests.  Each ballot you receive
     votes only your claims or equity interests.  Please complete and return
     each ballot you receive.  You must vote ALL of your claims or equity
     interests within a single class under the Prepackaged Plan to either accept
     or reject the Prepackaged Plan.  Accordingly, a ballot that partially
     rejects and partially accepts the Prepackaged Plan will not be counted.

3.   The ballot is for voting purposes only and does not constitute and shall
     not be deemed a proof of claim or interest or an assertion of a claim or
     interest.

                      PLEASE RETURN YOUR BALLOT PROMPTLY!

                      IF YOU HAVE ANY QUESTIONS REGARDING
                     THIS BALLOT OR THE VOTING PROCEDURES,
                                  PLEASE CALL:


                           MORTGAGE AND REALTY TRUST

                                 (215) 881-1525
<PAGE>
 
  Important:  A bankruptcy case has not been commenced as of the date of this
                                   document.

                           MORTGAGE AND REALTY TRUST

                                     BALLOT

                           FOR ACCEPTING OR REJECTING
      THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST

                           CLASS 4:  UNSECURED CLAIMS

- --------------------------------------------------------------------------------
     THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
     MIDNIGHT, NEW YORK CITY TIME, ON ___________, 1995, UNLESS EXTENDED.
- --------------------------------------------------------------------------------

     This Ballot is submitted to you to solicit your vote to accept or reject
the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated __________, 1995 (the "Proxy").  The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code.  At this time, the Trust has not
commenced a chapter 11 case.  If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.

     PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE
COMPLETING THIS BALLOT.

- --------------------------------------------------------------------------------
 IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT
    SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR
           COUNTED AS HAVING BEEN CAST.  PLEASE COMPLETE ITEMS 1-3.
- --------------------------------------------------------------------------------

     ITEM 1.  The undersigned, a Holder of a Class 4 Claim as defined in the
Prepackaged Plan, is the owner of Unsecured Claims, in the amount of:
$_________________________ (enter amount).

     ITEM 2.  VOTE.  The undersigned votes the Class 4 Claims referenced in Item
1 (check one box):
          [_] To ACCEPT the Prepackaged Plan  [_] To REJECT the Prepackaged Plan

     ITEM 3.  RELEASE.  Please indicate whether you elect to opt out of the
mutual release provided in Section 5.13 of the Prepackaged Plan by checking the
box below.
 
          [_] The undersigned DOES NOT CONSENT to the mutual release provided
              in Section 5.13 of the Prepackaged Plan.

     ITEM 4.   By signing this Ballot, the undersigned certifies that the
undersigned is the owner(s) of the Unsecured Claims voted on this Ballot and/or
has full power and authority to vote to accept or reject the Prepackaged Plan.
The undersigned also acknowledges receipt of the Proxy and other applicable
Solicitation Materials as well as all terms and conditions set forth therein.

     The signature(s) below should conform to the name(s) shown on the
document(s) representing the claims being voted.  Where claims are held in the
names of more than one person, all such beneficial owners should sign below.

DATED:

_____________________________________________________
(Signature)

_____________________________________________________
(Signature of Co-Owner, if applicable)

_____________________________________________________
(if by Authorized Agent, Name and Title)
<PAGE>
 
                      VOTING INFORMATION AND INSTRUCTIONS
                           FOR COMPLETING THE BALLOT

1.   FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-3, SIGN AND RETURN
     THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-
     ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE.

     If for any reason you did not receive a pre-addressed postage pre-paid
     business reply envelope or if the amount of your holdings indicated on the
     aforementioned label is unclear, please contact Daniel F. Hennessey at the
     telephone number below.

     BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON
     _______________, 1995 (THE "EXPIRATION DATE").  IF A BALLOT IS RECEIVED
     AFTER THE EXPIRATION DATE, IT WILL NOT BE COUNTED.

2.   If you hold claims or equity interests in more than one class under the
     Prepackaged Plan (i.e., common shares and notes), you should receive one
     ballot, coded by class number and one set of solicitation materials for
     each such class of claims or equity interests.  Each ballot you receive
     votes only your claims or equity interests.  Please complete and return
     each ballot you receive.  You must vote ALL of your claims or equity
     interests within a single class under the Prepackaged Plan to either accept
     or reject the Prepackaged Plan.  Accordingly, a ballot that partially
     rejects and partially accepts the Prepackaged Plan will not be counted.

3.   The ballot is for voting purposes only and does not constitute and shall
     not be deemed a proof of claim or interest or an assertion of a claim or
     interest.

                      PLEASE RETURN YOUR BALLOT PROMPTLY!

                      IF YOU HAVE ANY QUESTIONS REGARDING
                     THIS BALLOT OR THE VOTING PROCEDURES,
                                  PLEASE CALL:


                           MORTGAGE AND REALTY TRUST

                                 (215) 881-1525
<PAGE>
 
              Important: A bankruptcy case has not been commenced
                       as of the date of this document.

                           MORTGAGE AND REALTY TRUST

                                    BALLOT

                          FOR ACCEPTING OR REJECTING
      THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST

                            CLASS 5: COMMON SHARES

- --------------------------------------------------------------------------------
     THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
      MIDNIGHT, NEW YORK CITY TIME, ON _________, 1995, UNLESS EXTENDED.
- --------------------------------------------------------------------------------

     This Ballot is submitted to you to solicit your vote to accept or reject 
the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and 
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement 
and Proxy Statement, dated ___________, 1995 (the "Proxy"). The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the 
Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not 
commenced a chapter 11 case. If sufficient votes are received accepting the 
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11 
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as 
promptly as practicable.

     THIS BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY 
OTHER PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN. 
HOLDERS SHOULD NOT SURRENDER CERTIFICATES REPRESENTING SECURITIES AT THIS TIME, 
THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH CERTIFICATES.

     PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE 
COMPLETING THIS BALLOT.

- --------------------------------------------------------------------------------
IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT 
SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR COUNTED 
AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-3.
- --------------------------------------------------------------------------------

     ITEM 1. The undersigned, a Holder of a Class 5 Interest as defined in the 
Prepackaged Plan, is the beneficial owner of Common Shares, par value $1.00 per 
share, in the amount of: ______________ (enter number of shares).

     ITEM 2.  VOTE.  The undersigned votes all Class 5 Interests referenced in
Item 1 (check one box):
          
         [_] To ACCEPT the Prepackaged Plan  [_] To REJECT the Prepackaged Plan

     ITEM 3.  RELEASE.  Please indicate whether you elect to opt out of the 
mutual release provided in Section 5.13 of the Prepackaged Plan by checking the 
box below.

         [_]  The undersigned DOES NOT CONSENT to the mutual release provided in
              Section 5.13 of the Prepackaged Plan.

     ITEM 4. By signing this Ballot, the undersigned certifies that the 
undersigned is the beneficial owner(s) of the Common Shares voted on this Ballot
and/or has full power and authority to vote to accept or reject the Prepackaged 
Plan. The undersigned also acknowledges receipt of the Proxy and other 
applicable Solicitation Materials as well as all terms and conditions set forth 
therein.

     The signature(s) below should conform to the name(s) shown on the 
certificate(s) representing the Common Shares being voted. Where Common Shares 
are registered in the names of more than one person, all such beneficial owners 
should sign below.

DATED:

_________________________________________________
(Signature)

_________________________________________________
(Signature of Co-Owner, if applicable)

_________________________________________________
(if by Authorized Agent, Name and Title)
<PAGE>
 
                      VOTING INFORMATION AND INSTRUCTIONS
                           FOR COMPLETING THE BALLOT

1.   FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE, SIGN AND RETURN THE BALLOT 
     AS FOLLOWS:

     (a)   IF YOUR COMMON SHARES ARE HELD THROUGH A BROKER, BANK, OR OTHER
           NOMINEE: To have your vote count you must complete items 1-3 and
           return this ballot to such broker, bank or nominee. You must return
           the ballot to such entity, early enough for your vote to be processed
           and forwarded to and received by the solicitation agent prior to the
           expiration date.

           The broker, bank or other nominee should indicate on the ballot the
           number of shares held in your account as of the close of business on
           ______________, 1995, (the "Record Date".) Please locate that data
           and use that total number when completing Item 1. If that data has
           not been provided, please contact the institution(s) at which your
           account(s) are held and request the same.

     (b)   IF YOUR COMMON SHARES ARE REGISTERED IN YOUR OWN NAME: For your vote
           to be counted, you must complete Items 1-3 and return this ballot to
           the Trust, at the address set forth on the enclosed pre-addressed
           postage pre-paid business reply envelope. You will find the number of
           shares you held as of the close of business on the Voting Record Date
           indicated on the address label affixed to the front of the ballot.
           That total should be entered in Item 1.

           If for any reason you did not receive a pre-addressed postage pre-
           paid business reply envelope or if the amount of your holdings
           indicated on the aforementioned label is unclear, please contact
           Daniel F. Hennessey at the telephone number below.

     BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON
     _____________, 1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER
     THE EXPIRATION DATE, IT WILL NOT BE COUNTED.

2.   If you hold claims or equity interests in more than one class under the
     Prepackaged Plan (i.e., common shares and notes), you should receive one
     ballot, coded by class number and one set of solicitation materials for
     each such class of claims or equity interests. Each ballot you receive
     votes only your claims or equity interests. Please complete and return each
     ballot you receive. You must vote ALL of your claims or equity interests
     within a single class under the Prepackaged Plan to either accept or reject
     the Prepackaged Plan. Accordingly, a ballot that partially rejects and
     partially accepts the Prepackaged Plan will not be counted.

3.   THE BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY OTHER
     PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN.
     HOLDERS SHOULD NOT SURRENDER CERTIFICATES REPRESENTING THEIR SECURITIES AT
     THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH CERTIFICATES
     TRANSMITTED TOGETHER WITH A BALLOT. SURRENDER OF SECURITIES FOR EXCHANGE
     PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE ONLY PURSUANT TO A LETTER OF
     TRANSMITTAL, WHICH WILL BE FURNISHED TO YOU BY THE TRUST (OR ITS AGENT)
     AFTER CONFIRMATION OF THE PREPACKAGED PLAN BY THE BANKRUPTCY COURT.

4.   The ballot is for voting purposes only and does not constitute and shall 
     not be deemed a proof of claim or interest or an assertion of a claim or 
     interest.

                      PLEASE RETURN YOUR BALLOT PROMPTLY!

                      IF YOU HAVE ANY QUESTIONS REGARDING
                     THIS BALLOT OR THE VOTING PROCEDURES,
                                 PLEASE CALL:

                           MORTGAGE AND REALTY TRUST

                                (213) 881-1525



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