ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
sales opportunities as well as financing and refinancing sources for the Trust. The Advisor also serves as a consultant in connection with the Trust's business plan and investment policy decisions made by the Trust's Board of Trustees.
BCM is a company owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips served as a Trustee of the Trust until December 31, 1992. Mr. Phillips also served as a director of BCM until December 22, 1989 and as Chief Executive Officer of BCM until September 1, 1992. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services to the Trust. BCM is more fully described in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor".
BCM has been providing advisory services to the Trust since March 28, 1989. Renewal of BCM's advisory agreement with the Trust was approved at the annual meeting of the Trust's shareholders held on March 7, 1995. BCM also serves as advisor to Income Opportunity Realty Trust ("IORT") and Transcontinental Realty Investors, Inc. ("TCI"). The Trustees of the Trust are also directors or trustees of IORT and TCI and the officers of the Trust are also officers of IORT and TCI. Mr. Phillips is a general partner of Syntek Asset Management, L.P. ("SAMLP"), the general partner of National Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the operating partnership of NRLP. BCM performs certain administrative functions for NRLP and NOLP on a cost-reimbursement basis. BCM also serves as advisor to American Realty Trust, Inc. ("ART"). Mr. Phillips served as a director and Chairman of the Board of ART until November 16, 1992. Oscar W. Cashwell, President of the Trust, also serves as the President of BCM, IORT, TCI, as a director of ART and as the President and director of Syntek Asset Management, Inc. ("SAMI"), which is the managing general partner of SAMLP. The officers of the Trust, other than Mr. Cashwell, are also officers of ART. As of March 17, 1995, ART and BCM owned approximately 35% and 8%, respectively, of the Trust's outstanding shares of beneficial interest and BCM and the Trust owned approximately 41% and 7%, respectively, of ART's outstanding shares of common stock.
Since February 1, 1990, affiliates of BCM have provided property management services to the Trust. Currently, Carmel Realty Services, Ltd. ("Carmel, Ltd.") provides such property management services. Carmel, Ltd. subcontracts with other entities for the provision of the property-level management services to the Trust. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of nine of the Trust's commercial properties and the industrial warehouse facilities owned by a real estate partnership in which the Trust is a partner to Carmel Realty, Inc. ("Carmel Realty"), which is a company owned by SWI. Carmel Realty is entitled to
ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
receive property and construction management fees and leasing commissions in accordance with the terms of its property- level management agreement with Carmel, Ltd.
Carmel Realty is also entitled to receive real estate brokerage commissions in accordance with the terms of a nonexclusive brokerage agreement as discussed in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT - The Advisor."
The Trust has no employees. Employees of the Advisor render services to the Trust.
Competition
The real estate business is highly competitive and the Trust competes with numerous entities engaged in real estate activities (including certain entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Related Party Transactions"), some of which may have greater financial resources than those of the Trust. The Trust's management believes that success against such competition is dependent upon the geographic location of the property, the performance of property managers in areas such as marketing, collection and the ability to control operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors with respect to commercial and industrial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of the units and the ability to provide a community atmosphere for the tenants. The Trust's management believes that general economic circumstances and trends and new or renovated properties in the vicinity of each of the Trust's properties are also competitive factors.
To the extent that the Trust seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities also attempting to sell their properties and governmental agencies and financial institutions, whose assets are located in areas in which the Trust's properties are located, and are seeking to liquidate foreclosed properties.
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Related Party Transactions", certain of the officers and Trustees of the Trust also serve as officers and directors or trustees of certain other entities, each of which is also advised by BCM, and each of which has business objectives similar to the Trust's. The Trust's Trustees, officers and Advisor owe fiduciary duties to such other entities as well as to the Trust under applicable law. In determining to which entity a particular investment opportunity will be allocated, the officers, trustees or directors and the Advisor consider the respective investment objectives of each such entity and the appropriateness of a particular investment in light of each such
ITEM 1. BUSINESS (Continued)
Competition (Continued)
entity's existing real estate and mortgage notes receivable portfolios. To the extent that any particular investment opportunity is appropriate to more than one of such entities, such investment opportunity will be allocated to the entity which has had uninvested funds for the longest period of time or, if appropriate, the investment may be shared among all or some of such entities.
In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business Relationships", the Trust also competes with other entities which are affiliates of the Advisor and which may have investment objectives similar to the Trust's and that may compete with the Trust in purchasing, selling, leasing and financing real estate and real estate related investments. In resolving any potential conflicts of interest which may arise, the Advisor has informed the Trust that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to all the risks incident to ownership and financing of real estate and interests therein, many of which relate to the general illiquidity of real estate investments. These risks include, but are not limited to, changes in general or local economic conditions, changes in interest rates and the availability of permanent mortgage financing which may render the acquisition, sale or refinancing of a property difficult or unattractive and which may make debt service burdensome, changes in real estate and zoning laws, increases in real estate taxes, federal or local economic or rent controls, floods, earthquakes and other acts of God and other factors beyond the control of the Trust's management or Advisor. The illiquidity of real estate investments generally may impair the ability of the Trust to respond promptly to changing circumstances. The Trust's management believes that such risks are partially mitigated by the diversification by geographic region and property type of the Trust's real estate and mortgage notes receivable portfolios. However, to the extent new property acquisitions and mortgage lending are concentrated in any particular region, the advantages of diversification may be mitigated.
ITEM 2.
ITEM 2. PROPERTIES
The Trust's principal offices are located at 10670 North Central Expressway, Suite 300, Dallas, Texas 75231. In the opinion of the Trust's management, the Trust's offices are suitable and adequate for its present operations.
Details of the Trust's real estate and mortgage notes receivable portfolios at December 31, 1994, are set forth in Schedules III and IV, respectively, to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA". The discussions set
ITEM 2. PROPERTIES (Continued)
forth below under the headings "Real Estate" and "Mortgage Loans" provide certain summary information concerning the Trust's real estate and mortgage notes receivable portfolios.
The Trust's real estate portfolio consists of properties held for investment, investments in partnerships and properties held for sale. All of the properties held for sale were obtained through foreclosure of the collateral securing mortgage notes receivable. The discussion set forth below under the heading "Real Estate" provides certain summary information concerning the Trust's real estate and further summary information with respect to the Trust's properties held for investment, properties held for sale and investments in partnerships.
At December 31, 1994, none of the Trust's properties, partnership investments or mortgage notes receivable other than Sunset Towers Apartments, exceeded 10% of the Trust's total assets. At December 31, 1994, 68% of the Trust's assets consisted of properties held for investment, 11% consisted of properties held for sale, 8% consisted of investments in partnerships and 4% consisted of mortgage notes and interest receivable. The remaining 9% of the Trust's assets were cash, cash equivalents, marketable equity securities and other assets. It should be noted, however, that the percentage of the Trust's assets invested in any one category is subject to change and that no assurance can be given that the composition of the Trust's assets in the future will approximate the percentages listed above.
The Trust's real estate is geographically diversified. At December 31, 1994, the Trust held investments in apartments and commercial real estate (office buildings, industrial facilities and shopping centers) in each of the geographic regions of the continental United States. However, the Trust's apartment and commercial properties are concentrated in the Southeast, Southwest and Midwest regions. At December 31, 1994, the Trust held mortgage notes receivable secured by real estate located in the Southeast, Southwest and Midwest regions of the continental United States with a concentration in the Southeast and Midwest regions, as shown more specifically in the table under "Mortgage Loans" below.
To continue to qualify for federal taxation as a REIT under the Internal Revenue Code of 1986, as amended, the Trust is required, among other things, to hold at least 75% of the value of its total assets in real estate assets, government securities, cash and cash equivalents at the close of each quarter of each taxable year.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
ITEM 2. PROPERTIES (Continued)
Geographic Regions
The Trust has divided the continental United States into the following geographic regions.
Northeast region comprised of the states of Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and the District of Columbia. The Trust has 1 apartment in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The Trust has 3 apartments and 3 commercial properties in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and Texas. The Trust has 15 apartments and 4 commercial properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, West Virginia and Wisconsin. The Trust has 2 apartments and 2 commercial properties in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada, Utah and Wyoming. The Trust has 3 apartments and 1 commercial property in this region.
Pacific region comprised of the states of California, Oregon and Washington. The Trust has 2 apartments in this region.
Real Estate
At December 31, 1994, nearly 90% of the Trust's assets were invested in real estate. The Trust invests in real estate located throughout the continental United States, either on a leveraged or nonleveraged basis. The Trust's real estate portfolio consists of properties held for investment, investments in partnerships, foreclosed properties held for sale, and investments in the equity securities of real estate entities.
Types of Real Estate Investments. The Trust's real estate consists of commercial properties (office buildings, industrial facilities and shopping centers) and apartments or similar properties having established income-producing capabilities. In selecting new real estate investments, the location, age and type of property, gross rentals,
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
lease terms, financial and business standing of tenants, operating expenses, fixed charges, land values and physical condition are among the factors considered. The Trust may acquire properties subject to or assume existing debt and may mortgage, pledge or otherwise obtain financing for its properties. The Trust's Board of Trustees may alter the types of and criteria for selecting new real estate investments and for obtaining financing without a vote of shareholders to the extent such policies are not governed by the Trust's Declaration of Trust.
As of December 31, 1994, the Trust did not have any properties on which significant capital improvements were in process.
In the opinion of the Trust's management, the properties owned by the Trust are adequately covered by insurance.
The following table sets forth the percentages, by property type and geographic region, of the Trust's real estate (other than unimproved land and a single-family residence described below) at December 31, 1994.
The foregoing table is based solely on the number of apartment units and amount of commercial square footage owned by the Trust and does not reflect the value of the Trust's investment in each region. The Trust also owns three parcels of unimproved land, 5 acres located in the Southeast region, 128 acres and 6 acres in the Southwest region and one single- family residence located in the Southwest region. See Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a more detailed description of the Trust's real estate portfolio.
A summary of the activity in the Trust's owned real estate portfolio during 1994 is as follows:
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Properties Held for Investment. Set forth below are the Trust's properties held for investment and the monthly rental rate for apartments and the average annual rental rate for commercial properties and occupancy thereof at December 31, 1994 and 1993:
_______________________ * Property was purchased in 1994.
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Occupancy presented above and throughout this ITEM 2. is without reference to whether leases in effect are at, below or above market rates.
In January 1994, the Trust obtained mortgage financing secured by the previously unencumbered Park Lane Apartments in Dallas, Texas, in the amount of $1.3 million. The Trust received net cash of $1.1 million. The remainder of the financing proceeds were used to fund escrows for replacements and repairs and to pay various closing costs associated with the financing. The $1.3 million mortgage bears interest at a rate of 8.66% per annum through January 2004 and at a variable rate thereafter and requires monthly payments of principal and interest, currently $10,000. The note matures in February 2019. The Trust paid a mortgage brokerage and equity refinancing fee of $4,000 to BCM based upon the new mortgage of $1.3 million.
In February 1994, the Trust purchased the Fountain Lake Apartments, a 166 unit apartment complex in Texas City, Texas, for $3.3 million. The Trust paid $237,000 in cash, assumed an existing mortgage of $2.5 million and the seller provided additional financing of $402,000. The $2.5 million first mortgage bears interest at a variable rate, currently 5.9% per annum, requires monthly payments of principal and interest of $15,000 and matures in November 1998. The $402,000 seller financing is secured by a second lien mortgage on another of the Trust's properties, Windsor Plaza Office Building, in Windcrest, Texas. This mortgage bears interest at a variable rate, currently 6.6% per annum, requires monthly payments of principal and interest of $3,000 and also matures in November 1998. The Trust paid a real estate brokerage commission of $118,000 to Carmel Realty and an acquisition fee of $32,000 to BCM based on the $3.3 million purchase price of the property.
In March 1994, the Trust purchased the McCallum Crossing Apartments, a 322 unit apartment complex in Dallas, Texas, for $7.7 million. The Trust paid $1.4 million in cash and the seller provided $6.3 million in mortgage financing. The mortgage bears interest at rates ranging from 6.5% to 7.5% per annum, requires monthly payments of interest only through March 1, 1998 and principal and interest payments of $46,000 thereafter and matures in March 2004. The Trust paid a real estate brokerage commission of $224,000 to Carmel Realty and an acquisition fee of $77,000 to BCM based on the $7.7 million purchase price of the property.
In April 1994, the Trust obtained mortgage financing secured by the previously unencumbered Southgate Apartments in Roundrock, Texas, in the amount of $3.0 million. The Trust received net cash of $2.9 million. The remainder of the financing proceeds were used to fund escrows for replacements and repairs and to pay various closing costs associated with the financing. The $3.0 million mortgage bears interest at a rate of 9.625% per annum, requires monthly payments of principal and interest of $26,000 and matures in May 2004. The Trust paid a mortgage brokerage and equity refinancing fee of $30,000 to BCM based upon the new mortgage of $3.0 million.
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In May 1994, the Trust purchased the Willow Creek Apartments, a 112 unit apartment complex in El Paso, Texas, for $2.3 million in cash. The Trust paid a real estate brokerage commission of $89,000 to Carmel Realty and an acquisition fee of $23,000 to BCM based on the $2.3 million purchase price of the property. In December 1994, the Trust obtained mortgage financing secured by the property in the amount of $1.8 million. The Trust received net cash of $1.6 million after the payment of various closing costs associated with the financing. The $1.8 million mortgage bears interest at a rate of 10.25% per annum, requires monthly payments of principal and interest of $17,000 and matures in January 2002. The Trust paid a mortgage brokerage and equity refinancing fee of $18,000 to BCM based upon the new mortgage of $1.8 million.
Also in May 1994, the Trust obtained mortgage financing secured by the previously unencumbered 4242 Cedar Springs Apartments in Dallas, Texas, in the amount of $1.4 million. The Trust received net cash of $1.3 million after the payment of various closing costs associated with the financing. The $1.4 million mortgage bears interest at a rate of 9.9% per annum, requires monthly payments of principal and interest of $13,000 and matures in June 2004. The Trust paid a mortgage brokerage and equity refinancing fee of $14,000 to BCM based upon the new mortgage of $1.4 million.
In June 1994, the Trust purchased the Park Avenue Apartments, a 108 unit apartment complex in Clute, Texas, for $855,000 in cash. The Trust paid a real estate brokerage commission of $34,000 to Carmel Realty and an acquisition fee of $8,000 to BCM based on the $855,000 purchase price of the property.
In July 1994, the Trust obtained new mortgage financing secured by the Stone Oak Place Apartments in San Antonio, Texas, in the amount of $3.3 million. The Trust received net cash of $577,000 after the payoff of $2.5 million in existing mortgage debt that was scheduled to mature in April 1995. The remainder of the refinancing proceeds were used to fund escrows for replacements and repairs and to pay various closing costs associated with the refinancing. The new $3.3 million mortgage bears interest at a rate of 9.9% per annum, requires monthly principal and interest payments of $31,000 and matures in August 2004. The Trust paid a mortgage brokerage and equity refinancing fee of $33,000 to BCM based upon the new first mortgage financing of $3.3 million.
In August 1994, the Trust purchased the Parkwood Knoll Apartments, a 178 unit apartment complex in San Bernardino, California, for $6.4 million. The Trust paid $1.2 million in cash and assumed the existing mortgage of $5.2 million. The mortgage bears interest at a rate of 8.0% per annum, requires monthly payments of principal and interest of $40,000 and matures in February 2004. The Trust paid a real estate brokerage commission of $197,000 to Carmel Realty and an acquisition fee of $64,000 to BCM based on the $6.4 million purchase price of the property.
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In September 1994, the Trust purchased the Pierce Towers Apartments, a 57 unit apartment complex in Denver, Colorado, for $2.7 million. The Trust paid $678,000 in cash and assumed the existing mortgage of $2.0 million. The mortgage bears interest at a rate of 8.4% per annum, requires monthly payments of principal and interest of $15,000 and matures in December 2000. The Trust paid a real estate brokerage commission of $100,000 to Carmel Realty and an acquisition fee of $27,000 to BCM based on the $2.7 million purchase price of the property.
Also in September 1994, the Trust purchased the McLeod Commerce Center, a 111,115 square foot industrial facility in Orlando, Florida, for $3.2 million. The Trust paid $1.0 million in cash and the seller provided mortgage financing of $2.2 million. The mortgage bears interest at a rate of 9.5% per annum, requires monthly payments of principal and interest of $19,000 and matures in October 2001. The Trust paid a real estate brokerage commission of $116,000 to Carmel Realty and an acquisition fee of $32,000 to BCM based on the $3.2 million purchase price of the property.
In December 1994, the Trust purchased The Pines Apartments, a 242 unit apartment complex in Gainesville, Florida, for $6.2 million. The Trust paid $923,000 in cash, assumed the existing mortgage of $2.7 million and the seller provided additional financing of $2.7 million. The first mortgage bears interest at 9.6% per annum, requires monthly payments of principal and interest of $27,000 and matures in July 2011. The $2.7 million second mortgage bears interest at 9.5% per annum, requires monthly payments of interest only through September 1995 and monthly payments of principal and interest of $23,000 thereafter, and matures in December 1997. The Trust paid a real estate brokerage commission of $193,000 to Carmel Realty and an acquisition fee of $62,000 to BCM based on the $6.2 million purchase price of the property.
In February 1995, the Trust purchased the Sullyfield Commerce Center, a 243,813 square foot industrial facility in Chantilly, Virginia, for $11.0 million. The Trust paid $2.2 million in cash and the seller provided mortgage financing of $8.8 million. The mortgage bears interest at a rate of 6% per annum through December 1996 and 9% per annum thereafter, requires monthly payments of interest only through January 1999 and principal and interest payments of $73,000 thereafter and matures in January 2001. The Trust paid a real estate brokerage commission of $285,000 to Carmel Realty and an acquisition fee of $110,000 to BCM based on the $11.0 million purchase price of the property.
In February 1995, after determining that further investment in Genesee Towers, an office building in Flint, Michigan, could not be justified without a substantial modification of the mortgage debt, the Trust ceased making debt service payments on the $8.8 million nonrecourse mortgage secured by the property. The Trust is attempting to negotiate with the lender to modify the mortgage. However, there can be no assurance that such negotiations will be successful or that the Trust will continue to own the property. Accordingly, as of December
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
31, 1994, the carrying value of the property was written down by $1.2 million, which is included in the 1994 provision for losses, to the amount of the nonrecourse mortgage.
In March 1995, the Trust purchased the Zane May Warehouses, six industrial warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for $5.4 million. The Trust paid $696,000 in cash, obtained new mortgage financing of $4.6 million and the seller provided additional financing of $403,000. The $4.6 million mortgage bears interest at a variable rate, currently 9.25% per annum, requires monthly payments of interest only and matures in July 1999. The $403,000 of seller financings bear interest at rates ranging from 6% to 8% per annum, require monthly payments of principal and interest totaling $3,000 and mature in July 1999. The Trust paid a real estate brokerage commission of $178,000 to Carmel Realty and an acquisition fee of $54,000 to BCM based on the $5.4 million purchase price.
Partnership Properties. Set forth below are the properties owned by the partnerships in which the Trust is an equity investee and the average annual rental rate and occupancy thereof at December 31, 1994 and 1993:
The Trust, in partnership with National Income Realty Trust ("NIRT"), owns Sacramento Nine ("SAC 9") which in turn owns two office buildings in the vicinity of Sacramento, California. The Trust has a 30% general partner interest in the partnership. The Trust accounts for its investment in the partnership using the equity method. Until March 1995, Geoffrey C. Etnire, a Trustee of the Trust, served as a Trustee of NIRT. Until August 1994, Bennett B. Sims and Ted P. Stokely, Trustees of the Trust, also served as Trustees of NIRT. Until March 31, 1994, BCM served as advisor to NIRT. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The Trust and NIRT are also the partners in Income Special Associates ("ISA"), a joint venture partnership in which the Trust has a 60% partnership interest. ISA in turn owns a 100% interest in Indcon, L.P. ("Indcon"), formerly known as Adams Properties Associates. Indcon owns 32 industrial warehouse facilities. The Indcon partnership agreement requires consent of both the Trust and NIRT for any material changes in the operations of the partnership's properties, including sales, refinancings and changes in property manager. Therefore, the Trust is a noncontrolling partner and accounts for its investment in Indcon using the equity method. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
In May 1994, Indcon sold one of its industrial warehouses for $4.4 million in cash. Indcon received net cash of $2.1 million, of which the Trust's equity share was $1.3 million, after the payoff of an existing mortgage with a principal balance of $1.8 million and the payment a $133,000 prepayment penalty. Indcon recognized a gain of $962,000 on the sale, of which the Trust's equity share was $577,000. Indcon paid a real estate sales commission of $104,000 to Carmel Realty based upon the $4.4 million sales price of the property.
Foreclosed Properties Held for Sale. Set forth below are the Trust's foreclosed properties held for sale (except for a single-family residence) and monthly rental rate for apartments and the average annual rental rate for commercial properties and occupancy thereof at December 31, 1994 and 1993:
* Properties obtained through foreclosure in 1994.
In September 1994, the Trust recorded the insubstance foreclosure of the Circletree Apartments, a 414 unit apartment complex in Waukegan, Illinois. The Circletree Apartments had an estimated fair value, less estimated costs of sale, of $8.1 million at the date of foreclosure, which approximated the carrying value of the Trust's mortgage note receivable. The foreclosure resulted in no loss to the Trust. Foreclosure proceedings were completed in October 1994.
Also in September 1994, the Trust recorded the insubstance foreclosure of the Woodbridge Apartments, a 194 unit apartment complex in Westminster, Colorado. The Woodbridge Apartments had an estimated fair value, less estimated costs of sale, of $3.3 million at the date of foreclosure,
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
which exceeded the carrying value of the Trust's mortgage note receivable. The foreclosure resulted in no loss to the Trust. Foreclosure proceedings were completed in February 1995.
In February 1994, the Trust sold the Kimberly Square Shopping Center, a foreclosed property held for sale in Fort Lauderdale, Florida, for $1.0 million in cash. No loss in excess of the reserve previously provided was incurred. The Trust paid a real estate sales commission of $30,000 to Carmel Realty based upon the $1.0 million sales price of the property.
In May 1994, the Trust sold the retail portion of Forest Ridge, a foreclosed apartment and retail property held for sale in Denton, Texas. The property was sold for $365,000, with the Trust providing purchase money financing for the entire sales price. The Trust recognized neither a gain or loss on the sale. The mortgage note receivable bears interest at a rate of 7.5% per annum for the first three years, increasing to 8.3% per annum from May 1997 until maturity in May 2001. The note requires monthly payments of principal and interest, currently $3,000. The Trust paid a real estate sales commission of $15,000 to Carmel Realty based upon the $365,000 sales price of the property.
In June 1994, the Trust sold a 546 acre tract of foreclosed undeveloped land held for sale in Morgan, Utah for $110,000 in cash. No loss in excess of the reserve previously provided was incurred. The Trust paid a real estate sales commission of $4,000 to Carmel Realty based upon the $110,000 sales price of the property.
Also in June 1994, the Trust sold the Oak Forest Apartments, a foreclosed property held for sale in Tampa, Florida, for $900,000 in cash. The Trust recognized a loss on the sale of $200,000 in excess of previously provided reserves, which was provided by a direct charge against earnings in the first quarter of 1994. The Trust paid a real estate sales commission of $36,000 to Carmel Realty based upon the $900,000 sales price of the property.
In December 1994, the Trust sold two single family residences located in Arizona and South Dakota, which it had obtained through foreclosure. The Trust received $155,000 in cash from the sales. No loss in excess of the reserves previously provided was incurred.
The three parcels of unimproved land owned by the Trust were each obtained through foreclosure. Two were obtained through foreclosure of a mortgage note secured primarily by office buildings. The third and largest, the Round Mountain parcel, was intended to be developed in 1983 when the Trust funded the mortgage loan secured by the land.
The Trust intends to hold these parcels of unimproved land until the market conditions in the areas in which the properties are located improve, at which time the Trust intends to offer the properties for sale. The Declaration of Trust provides that the Trust may not invest in unimproved real estate or make mortgage loans secured by unimproved
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
real estate unless the property is being or is expected to be developed within a reasonable period of time or unless the unimproved real estate serves as additional security on a permitted type of mortgage loan.
During 1994, many of the real estate markets where the Trust owns foreclosed property, particularly in Texas, continued to stabilize and the Trust intends to increase its emphasis on the sale of foreclosed properties in 1995. However, because of increasing interest rates in 1994, it is often difficult for potential buyers to obtain financing even for performing properties because, among other factors, traditional real estate lenders remain extremely cautious in approving new mortgage loans.
Mortgage Loans
In addition to real estate, a substantial portion of the Trust's assets are invested in mortgage notes receivable, principally those secured by income-producing properties. The Trust expects that the percentage of its assets invested in mortgage notes will decrease, as it has determined that it will no longer seek to fund or acquire new mortgage notes, other than those which it may originate in conjunction with providing purchase money financing in conjunction with a property sale. The Trust does intend, however, to service and hold for investment the mortgage notes currently in its portfolio. The Trust's mortgage notes receivable consist of first mortgage loans and junior mortgage loans.
Types of Mortgage Activity. In the past, the Trust has originated its own mortgage loans as well as acquired existing mortgage notes either directly from builders, developers or property owners, or through mortgage banking firms, commercial banks or other qualified brokers. The Trust is not considering new mortgage lending, except in connection with purchase money financing offered to facilitate the sale of Trust properties. BCM, in its capacity as a mortgage servicer, services the Trust's mortgage notes. The Trust's investment policy is described in ITEM 1. "BUSINESS - Business Plan and Investment Policy".
Types of Properties Subject to Mortgages. The properties securing the Trust's mortgage notes receivable portfolio at December 31, 1994, consisted of office buildings, apartments and single-family residences. To the extent that the Declaration of Trust does not control such matters, the Trust's Board of Trustees may alter the types of properties subject to mortgage loans in which the Trust invests without a vote of the Trust's shareholders. In addition to restricting the types of collateral and priority of mortgages, the Declaration of Trust imposes certain restrictions on transactions with related parties, as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
At December 31, 1994, the Trust's mortgage notes receivable portfolio included ten mortgage loans with an aggregate outstanding balance of $10.3 million secured by income-producing real estate located throughout the United States and seven mortgage loans with an outstanding balance
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
of $667,000 secured by single-family residences also located throughout the United States. At December 31, 1994, 4% of the Trust's assets were invested in mortgage notes (3% in first mortgage loans and 1% in junior mortgage loans).
The following table sets forth the percentages (based on the outstanding mortgage note balance) , by both property type and geographic region, of the properties that serve as collateral for the Trust's outstanding mortgage notes receivable portfolio at December 31, 1994. The table does not include the $667,000 in mortgage notes secured by single-family residences discussed in the preceding paragraph. See Schedule IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for further details of the Trust's mortgage notes receivable portfolio.
A summary of the activity in the Trust's mortgage notes receivable portfolio during 1994 is as follows:
First Mortgage Loans. The Trust has invested in first mortgage notes, with either short, medium or long-term maturities. First mortgage loans generally provide for level periodic payments of principal and interest sufficient to substantially repay the loan prior to maturity, but may involve interest-only payments or moderate amortization of principal and a "balloon" principal payment at maturity. With respect to first mortgage loans, it was the Trust's general policy to require that the borrower provide a mortgagee's title policy or an acceptable legal title opinion as to the validity and the priority of the mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders in the relevant area. The Trust may grant to other lenders participations in first mortgage loans originated by the Trust.
The following discussion briefly describes the first mortgage loans that the Trust originated or otherwise acquired, as well as events that affected previously funded first mortgage loans, during 1994.
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
During 1994, the Trust foreclosed on a single-family residence in South Dakota securing one of its mortgage notes. No loss was recorded on the foreclosure. The property was sold in December 1994, as discussed under "Real Estate" above. At December 31, 1994, seven mortgage notes secured by single family residences, with principal balances totaling $667,000, remained in the Trust's mortgage note receivable portfolio.
As discussed under "Real Estate" above, in May 1994, the Trust sold the retail portion of Forest Ridge, a foreclosed apartment and retail property held for sale in Denton, Texas. The property was sold for $365,000, with the Trust providing purchase money financing for the entire sales price. The mortgage note receivable bears interest at a rate of 7.5% per annum for the first three years, increasing to 8.3% per annum from May 1997 until maturity in May 2001. The note requires monthly payments of principal and interest, currently $3,000.
In December 1994, as discussed below, the Trust accepted the assignment of a first mortgage note in settlement of the profit participation as provided in the wraparound mortgage secured by the Fountainview Retirement Center.
At December 31, 1994, a $700,000 first mortgage note secured by an office building in Titusville, Florida, an $891,000 first mortgage note secured by an apartment in Detroit, Michigan and an $1.5 million first mortgage secured by another apartment in Detroit, Michigan were in default. The Trust is currently evaluating its options with respect to foreclosure of the collateral properties securing these notes. If the Trust forecloses the collateral properties, the Trust does not anticipate incurring losses in excess of previously established reserves.
Also at December 31, 1994, a $1.5 million first mortgage secured by a ranch located in Henderson County, Texas, was in default. In February 1994, the Trust and the borrower agreed to modify and extend the note. In exchange for the Trust agreeing to extend the maturity date to November 1, 1995, the borrower paid all past due interest and made a $127,000 paydown on the principal balance of the note. The borrower was also required to make an additional $200,000 principal paydown on November 1, 1994, which had not been made as of March 17, 1995. The borrower is currently negotiating with the Trust for an 18 month extension of the note in return for a principal paydown and a pledge of additional collateral to secure the note. If negotiations are unsuccessful and the Trust forecloses on the collateral property, it does not anticipate incurring a loss, as the estimated fair value of the property securing the note is in excess of the carrying value of the note.
Wraparound Mortgage Loans. The Trust has invested in wraparound mortgage loans, sometimes called all-inclusive loans, made on real estate subject to prior mortgage indebtedness. A wraparound mortgage
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
loan is a mortgage loan having an original principal amount equal to the outstanding balance under the prior existing mortgage loan(s) plus the amount actually advanced under the wraparound mortgage loan.
Wraparound mortgage loans may provide for full, partial or no amortization of principal. The Trust's policy was to make wraparound mortgage loans in amounts and on properties as to which it would otherwise make first mortgage loans. The Trust did not originate or acquire any wraparound mortgage loans during 1994. The following discussion briefly describes the events that affected previously funded wraparound mortgage loans during 1994.
In December 1994, the Trust received payment in full on the wraparound mortgage note secured by the Fountainview Retirement Center. The Trust received $5.0 million in cash, equal to the Trust's equity in the wraparound mortgage note.
In addition, the note agreement required that the debtor make an additional profit participation payment equal to 62.5% of the amount by which the fair market value of the property on the maturity date of the loan exceeded the original loan principal balance. In settlement of the profit participation, the borrower assigned a $1.8 million first mortgage note, secured by Cypress Creek Executive Court, an office building in Ft. Lauderdale, Florida, to the Trust, for which the Trust paid $283,000 in cash. The first mortgage bears interest at rates ranging from 8.0% to 9.0% per annum, requires monthly payments of principal and interest, currently $15,000, and matures in June 2009. The Trust discounted the note to yield 12.0% per annum. The Trust recognized $1.1 million gain on the settlement of the profit participation.
In January 1994, the borrower on a $7.9 million wraparound mortgage loan secured by the Circletree Apartments in Waukegan, Illinois filed for bankruptcy protection and in September 1994, the Trust recorded the insubstance foreclosure of the apartment complex securing the wraparound mortgage note receivable. The foreclosure resulted in no loss to the Trust. See "Real Estate," above.
Junior Mortgage Loans. The Trust has invested in junior mortgage loans. Such loans are secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and personal guarantees by the borrower. The Trust's Declaration of Trust restricts investment in junior mortgage loans, excluding wraparound mortgage loans, to not more than 10% of the Trust's assets. At December 31, 1994, 1% of the Trust's assets were invested in junior mortgage loans.
The Trust did not originate or acquire any junior mortgage loans during 1994. The following discussion briefly describes the events that affected previously funded junior mortgage loans during 1994.
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
In September 1994, the Trust recorded the insubstance foreclosure of the Woodbridge Apartments in Westminster, Colorado, which secured a $1.9 million junior mortgage note receivable. The foreclosure resulted in no loss to the Trust. See "Real Estate," above.
In September 1991, the Trust funded a $2.0 million junior mortgage loan, secured by the Aspen Village Townhomes, located in Hartland, Wisconsin. The note accrues interest at the default interest rate of 18% per annum. The note had an extended maturity date of April 27, 1992. On March 27, 1992, the Trust funded an additional $150,000 junior lien mortgage loan, also secured by the Aspen Village Townhomes. This note also bears interest at the default interest rate of 18% per annum. This note had an extended maturity of September 23, 1992. The borrower failed to make the required principal payments to the Trust on the maturity dates. The Trust continues to negotiate with the borrower to restructure the notes, with the borrower providing additional collateral to secure these loans. If the negotiations are unsuccessful and the Trust forecloses on the collateral property, it does not anticipate incurring a loss in excess of previously established reserves.
Equity Investments in Real Estate Entities
In September 1990, the Trust's Board of Trustees authorized the purchase of up to $2.0 million of the common stock of ART through negotiated or open market transactions. The officers of the Trust serve as officers or directors of ART and BCM, the Trust's advisor, also serves as advisor to ART. At March 17, 1995, ART owned approximately 35% of the Trust's outstanding shares of beneficial interest. At December 31, 1994, the Trust owned 204,522 shares of ART's common stock, approximately 7% of ART's outstanding shares of common stock, which the Trust had purchased in open market transactions in 1990 and 1991, at a total cost to the Trust of $1.6 million. The ART common stock owned by the Trust is considered to be available for sale and accordingly, is carried at fair value defined as the period end closing market value. At December 31, 1994, the market value of the ART shares was $2.7 million. See ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
In December 1990, the Trust's Board of Trustees authorized the purchase of up to $1.0 million of the shares of beneficial interest of NIRT, a REIT that until March 31, 1994, was also advised by BCM, and up to $1.0 million of the shares of common stock of TCI through negotiated or open market transactions. The Trustees of the Trust serve as directors of TCI and the officers of the Trust also serve as officers of TCI. BCM, the Trust's advisor, serves as advisor to TCI. At December 31, 1994, the Trust owned 76,893 shares of beneficial interest of NIRT acquired at a total cost to the Trust of $415,000 and 53,000 shares of common stock of TCI acquired at a total cost to the Trust of $235,000 all of which shares the Trust had purchased in open market transactions in 1990 and 1991. The Trust's investment in these entities is also considered as available for sale and is also carried at fair value. At December 31, 1994, the market value of the Trust's investment in NIRT and TCI shares was $894,000 and $788,000, respectively.
ITEM 2. PROPERTIES (Continued)
Equity Investments in Real Estate Entities (Continued)
Under the original terms of the Declaration of Trust, the Trust was prohibited from investing in equity securities for a period in excess of 18 months. However, pursuant to an amendment to the Trust's Declaration of Trust approved by the Trust's shareholders, the Trust may hold these shares of ART, NIRT and TCI until July 30, 1996.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
In February 1990, the Trust, together with IORT, NIRT and TCI, three real estate entities with, at the time, the same officers, directors or trustees and advisor as the Trust, entered into a settlement of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al., relating to the operation and management of each of such entities. On April 23, 1990, the court granted final approval of the terms of the settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of Settlement dated April 27, 1994 (the "Modification") which settled subsequent claims of breaches of the settlement which were asserted by the plaintiffs and modified certain provisions of the April 1990 settlement. The Modification was preliminarily approved by the court on July 1, 1994 and final court approval was entered on December 12, 1994. The effective date of the Modification is January 11, 1995.
The Modification, among other things, provided for the addition of three new unaffiliated members to the Trust's Board of Trustees and set forth new requirements for the approval of any transactions with affiliates over the next five years. In addition, BCM, the Trust's advisor, Mr. Phillips and William S. Friedman, who served as President and Trustee of the Trust until February 24, 1994, President of BCM until May 1, 1993 and director of BCM until December 22, 1989, agreed to pay a total of $1.2 million to the Trust, IORT, NIRT and TCI, of which the Trust's share is $750,000. The Trust received $187,000 in May 1994. The remaining $563,000 is to be paid in 18 monthly installments which began February 1, 1995.
Under the Modification, the Trust, IORT, NIRT, TCI and their shareholders released the defendants from any claims relating to the plaintiffs' allegations. The Trust, IORT, NIRT and TCI also agreed to waive any demand requirement for the plaintiffs to pursue claims on behalf of each of them against certain persons or entities. The Modification also requires that any shares of the Trust held by Messrs. Phillips, Friedman or their affiliates shall be (i) voted in favor of the reelection of all current members of the Trust's Board of Trustees that stand for reelection during the two calendar years following the effective date of the Modification and (ii) voted in favor of all new members of the Trust's Board of Trustees appointed pursuant to the terms of the Modification that stand for reelection during the three calendar years following the effective date of the Modification.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
Pursuant to the terms of the Modification, any related party transaction which the Trust may enter into prior to April 27, 1999, will require the unanimous approval of the Trust's Board of Trustees. In addition, related party transactions may only be entered into in exceptional circumstances and after a determination by the Trust's Board of Trustees that the transaction is in the best interests of the Trust and that no other opportunity exists that is as good as the opportunity presented by such transaction.
The Modification also terminated a number of the provisions of the settlement, including the requirement that the Trust, IORT, NIRT and TCI maintain a Related Party Transaction Committee and a Litigation Committee of their respective Boards. The court retained jurisdiction to enforce the Modification.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust held its annual meeting of shareholders on March 7, 1995, at which meeting the Trust's shareholders were asked to consider and vote upon (i) the election of Trustees of the Trust and (ii) the renewal of the Trust's advisory agreement with BCM.
At such meeting the Trust's shareholders elected the following individuals as Trustees of the Trust:
Also at such meeting the Trust's shareholders approved the renewal of the Trust's advisory agreement with BCM until the next annual meeting of the Trust's shareholders with 2,276,340 votes for the proposal, 50,469 votes against the proposal and 58,487 votes abstaining.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED SHAREHOLDER MATTERS
The Trust's shares of beneficial interest are traded on The Nasdaq Stock Market ("Nasdaq") using the symbol "CMETs". The following table sets forth the high and low prices as reported by the Nasdaq.
As of March 17, 1995, the closing price of the Trust's shares of beneficial interest on the Nasdaq was $15.00 per share.
As of March 17, 1995, the Trust's shares of beneficial interest were held by 7,484 holders of record.
Based on the performance of the Trust's properties, in January 1993, the Trust's Board of Trustees approved the resumption of quarterly shareholder distributions. The Trust paid distributions in 1994 and 1993 as follows:
On December 5, 1989, the Trust's Board of Trustees approved a program for the Trust to repurchase its shares of beneficial interest. The Trust's Board of Trustees has authorized the Trust to repurchase a total of 976,667 of its shares of beneficial interest pursuant to such program. Through March 17, 1995, the Trust had repurchased 785,150 of its shares at a total cost to the Trust of $5.0 million. The Trust purchased 6,000 of its shares of beneficial interest during 1994 at a total cost to the Trust of $84,000.
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED SHAREHOLDER MATTERS (Continued)
On March 24, 1989, the Trust distributed one share purchase right for each outstanding share of beneficial interest of the Trust. On December 10, 1991, the Trust's Board of Trustees voted to redeem the rights, having determined that the rights were no longer necessary to protect the Trust from coercive tender offers. In connection with such redemption, Messrs. Phillips and Friedman and their affiliates, who owned approximately 28% of the Trust's outstanding shares of beneficial interest at the time, agreed not to acquire more than 40% of the Trust's outstanding shares of beneficial interest without the prior action of the Trust's Board of Trustees to the effect that they do not object to such increased ownership.
On August 23, 1994, the Trust's Board of Trustees took action to the effect that they do not object to the acquisition of up to 49% of the Trust's outstanding shares of beneficial interest by Mr. Phillips and his affiliates. In determining total ownership, shares of beneficial interest of the Trust, if any, owned by Mr. Friedman and his affiliates are no longer to be included. Pursuant to this action, Mr. Phillips and his affiliates may not acquire more than 49% of the Trust's outstanding shares of beneficial interest without the prior action of the Trust's Board of Trustees to the effect that they do not object to such increased ownership. At March 17, 1995, Mr. Phillips and his affiliates, primarily ART and BCM, owned approximately 43% of the Trust's outstanding shares of beneficial interest.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Continental Mortgage and Equity Trust (the "Trust") was formed to invest in real estate through acquisitions, leases and partnerships and in mortgage loans on real estate, including wraparound, first and junior mortgage loans. The Trust was organized on August 27, 1980 and commenced operations on December 3, 1980.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $7.5 million at December 31, 1994 compared with $1.8 million at December 31, 1993. The principal reasons for this increase in cash are discussed in the paragraphs below.
The Trust's principal sources of cash have been and will continue to be from property operations, proceeds from property sales, principal payments on mortgage notes receivable and borrowings. The Trust expects that funds from operations and from anticipated external sources, such as property sales, financings and refinancings, will be sufficient to meet the Trust's various cash needs in 1995, including, but not limited to, the payment of distributions, debt service obligations coming due and property maintenance and improvements, as more fully discussed in the paragraphs below.
The Trust's cash flow from property operations (rentals collected less payments for property operating expenses) has continually increased over the past three years from $6.1 million in 1992 to $8.4 million in 1993 to $10.7 million in 1994. Of this $4.6 million net increase from 1992 to 1994, $4.2 million is the result of the Trust having acquired additional income producing properties, both through purchase and foreclosure, and the remainder of $400,000 is due to increased occupancy and rental rates, primarily at its apartments, and the Trust's control of operating expenses. The Trust's management believes that this trend will continue, particularly in the Trust's apartments, if the economy remains stable or improves.
Interest collected on mortgage notes receivable decreased over the past three years from $3.2 million in 1992 to $2.4 million in 1993 to $2.2 million in 1994. These decreases are primarily attributable to the foreclosure of the collateral property securing mortgage notes receivable and the payoff of mortgage notes receivable in 1993 and 1994.
Interest will continue to decrease as a source of cash to the Trust as a result of the payoff of mortgage notes receivable and the foreclosure of the collateral property securing mortgage notes receivable in 1994 and 1993. In addition, the Trust has determined not to originate new mortgage loans, other than those resulting from Trust provided purchase money financing in connection with property sales.
The Trust was involved in significant investing activities during 1994. The Trust purchased seven apartments and one commercial property during 1994, for which the Trust paid a total of $33.5 million. The Trust paid $9.9 million in cash, with an additional $23.6 million
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
financed through mortgage debt. The Trust also made improvements to its other properties totaling $729,000 and received $2.2 million in cash from the sale of five of its properties and an additional $1.3 million in cash from the sale of a property by one of the Trust's equity method partnerships. In addition, the Trust collected $5.6 million on notes receivable, primarily from the payoff of two mortgage notes receivable totaling $5.4 million, with the remainder collected from scheduled paydowns on the Trust's other mortgage notes receivable.
During 1994, the Trust received net financing proceeds of $6.9 million from mortgage financing secured by four previously unencumbered apartment complexes. In addition, the Trust refinanced the mortgage secured by another apartment complex from which the Trust received $646,000 in net cash proceeds after the payoff of $2.5 million in existing mortgage debt. Also during 1994, the Trust made scheduled principal payments on mortgages totaling $1.1 million.
The Trust's distribution policy had provided for an annual determination of distributions after the Trust's year end until such time as property operations stabilized at a level producing cash flow from property operations in excess of anticipated needs. In January 1993, the Trust's Board of Trustees approved the resumption of quarterly distributions. In 1994, the Trust paid distributions to shareholders totaling $1.8 million ($.60 per share). The Trust paid distributions to shareholders totaling $1.5 million ($.50 per share) in 1993.
During the first quarter of 1995, the Trust has continued to be an active investor. The Trust has purchased two industrial facilities, for which the Trust paid a total of $2.9 million in cash with an additional $13.8 million financed through mortgage debt. The Trust derived the cash portions of the purchase prices from its cash on hand at December 31, 1994.
During 1994, the Trust repurchased 6,000 of its shares of beneficial interest at a cost of $84,000, pursuant to a repurchase program originally announced by the Trust on December 5, 1989. The Trust's Board of Trustees have authorized the Trust to repurchase a total of 976,667 of its shares of beneficial interest under such repurchase program, of which 191,517 shares remain to be purchased as of March 17, 1995.
On a quarterly basis, the Trust's management reviews the carrying value of the Trust's mortgage notes receivable, properties held for investment and properties held for sale. Generally accepted accounting principles require that the carrying value of an investment cannot exceed the lower of its cost or its estimated net realizable value. In those instances in which estimates of net realizable value of the Trust's properties or notes are less than the carrying value thereof at the time of evaluation, a provision for loss is recorded by a charge against earnings. Estimated net realizable value of mortgage notes receivable is based on the Trust's management's review and evaluation of the
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
collateral properties securing such notes. The property review generally includes selective property inspections, a review of the property's current rents compared to market rents, a review of the property's expenses, a review of maintenance requirements, discussions with the manager of the property and a review of properties in the surrounding area.
Results of Operations
1994 compared to 1993. For the year 1994, the Trust had a net loss of $833,000, as compared to net income of $615,000 for the year 1993. The primary factors contributing to the decrease in the Trust's net income are discussed in the following paragraphs.
Net rental income (rental income less property operating expenses) increased from $8.2 million in 1993 to $10.2 million in 1994. Of this increase, $1.5 million is due to the acquisition of seven apartment complexes and one commercial property in 1994. An additional $284,000 of the increase is attributable to two apartment complexes obtained through foreclosure in 1994 and $1.1 million is due to the acquisition of three apartment complexes and one commercial property in 1993. An additional increase of approximately $400,000 is attributable to generally higher rents and occupancy at the Trust's properties. These increases are offset in part by a $1.3 million decrease in net rental income at four of the Trust's commercial properties and three of the Trust's apartment complexes due to a decrease in occupancy and higher operating expenses incurred in an effort to increase occupancy. Net rental income is expected to continue to increase in 1994, primarily from a full year of operations from the seven apartment complexes and one commercial property acquired in 1994 and from the anticipated purchase of additional real estate in 1995.
Interest income decreased from $3.3 million in 1993 to $2.7 million in 1994. Of this decrease, $356,000 is attributable to a loan on which the borrower filed for bankruptcy protection in November 1993 and began making cash flow only payments in April 1994. The Trust completed foreclosure of the property securing this loan in October 1994. Of the decrease, an additional $191,000 is attributable to three loans which were paid off subsequent to August 1993 and $38,000 is attributable to loans which were classified as nonperforming in 1994. Interest income is expected to decline further in 1995 due to a $14.0 million wraparound mortgage note receivable being paid in full in December 1994 and due to the foreclosure during 1994 of two properties securing two of the Trust's other mortgage notes receivable. Further, the Trust is not considering new mortgage lending except in connection with purchase money financing of sales of the Trust's properties.
The Trust's equity in losses of partnerships decreased from $578,000 in 1993 to $479,000 in 1994. This decrease in equity losses is primarily due to higher rents and occupancy at the 32 industrial warehouse
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
facilities owned by Indcon, L.P. ("Indcon"), a joint venture partnership in which the Trust owns a 60% interest.
Interest expense increased from $5.5 million in 1993 to $7.7 million in 1994. Of this increase, $1.5 million is due to interest expense recorded on mortgages secured by properties acquired in 1993 and 1994. An additional $597,000 is due to interest expense on a borrowing in September 1993 and four borrowings in 1994, all secured by mortgages on previously unencumbered apartment complexes.
Depreciation expense increased from $2.4 million in 1993 to $3.2 million in 1994. This increase is due to the acquisition of seven apartment complexes and one commercial property in 1994 and four apartment complexes and one commercial property in 1993.
A provision for losses of $1.2 million was recorded in 1994 to write down the Genesee Towers, an office building, to the amount of the nonrecourse mortgage debt. In addition, a provision for losses of $200,000 was recorded in 1994 to provide for the loss on the sale of Oak Forest Apartments, one of the Trust's foreclosed properties held for sale. (See NOTE 4. "REAL ESTATE.") A provision for loss of $221,000 was recorded in 1993 to provide for the loss on the sale of English Hills Apartments, also a foreclosed property held for sale.
Advisory fee to affiliate increased from $1.2 million in 1993 to $1.3 million in 1994. This increase is due to an increase in the Trust's gross assets, the basis for the advisory fee, as a result of the Trust's acquisition of eight properties in 1994 and five properties in 1993. The advisory fee is expected to continue to increase as the Trust makes additional property acquisitions.
General and administrative expenses decreased from $1.3 million in 1993 to $1.2 million in 1994. A decrease in legal fees and expenses incurred in connection with the Trust's annual meeting were offset in part by an increase in cost reimbursements to the Trust's advisor.
For the year 1994, the Trust recognized a gain on the sale of real estate of $577,000 related to the sale of an industrial warehouse facility by Indcon, a joint venture partnership in which the Trust owns a 60% interest. In addition, the Trust recognized a gain of $1.1 million on the settlement of a profit participation related to the 1994 payoff of one of the Trust's notes receivable. For the year 1993, the Trust recognized gains on sale of real estate of $365,000 related to the sale of three properties by Sacramento Nine ("SAC 9"), a joint venture partnership in which the Trust owns a 30% interest.
1993 compared to 1992. For the year 1993, the Trust had net income of $615,000, as compared to net income of $758,000 for the year 1992. The primary factors contributing to the decrease in the Trust's net income are discussed in the following paragraphs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Net rental income (rental income less property operating expenses) increased from $6.3 million in 1992 to $8.2 million in 1993. Of this increase, $1.3 million is due to the acquisition of five apartment complexes, one office building and one industrial facility in 1992 and 1993, and an additional $165,000 is due to a decrease in operating expenses at Applecreek Apartments, the renovation of which was completed in 1992. The remaining increase is attributable to generally higher rental and occupancy rates, primarily at the Trust properties in the Southwest and Southeast, and reduced operating expenses at the Trust's apartment complexes.
Interest income decreased from $4.2 million in 1992 to $3.3 million in 1993. Of this decrease, $502,000 is due to loans which were paid in full in 1992 and 1993 and an additional $312,000 is due to interest income recorded on loans which were foreclosed or settled in 1992 and 1993. The remaining decrease is due to loans which were placed on nonaccrual in 1993.
The Trust's equity in losses of partnerships increased from losses of $344,000 in 1992 to losses of $578,000 in 1993. This increase is primarily due to decreased operating results in the SAC 9 partnership as a result of the sale of three properties in the second quarter of 1993.
Interest expense increased from $5.1 million in 1992 to $5.5 million in 1993. Of this increase, $847,000 is due to interest expense incurred on mortgages secured by properties which were acquired in late 1992 and in 1993. An additional increase of $73,000 is due to interest expense recorded on a first mortgage obtained in September 1993, secured by a previously unencumbered apartment property. These increases were partially offset by a decrease in interest expense of $458,000 attributable to a mortgage modification in November 1992 and an underlying mortgage debt related to a wraparound mortgage note receivable which was paid off in December 1992.
Depreciation expense increased from $2.0 million in 1992 to $2.4 million in 1993. This increase is primarily due to the acquisition of five apartment complexes and two commercial properties in late 1992 and in 1993.
A provision for loss of $221,000 was recorded in 1993 to provide for the loss on the sale of English Hills Apartments, a foreclosed property held for sale. No provision for loss was recorded in 1992.
General and administrative expenses decreased from $1.4 million in 1992 to $1.3 million in 1993. This decrease is due to a decrease of $100,000 related to costs incurred in connection with the Trust's March 1992 annual meeting of shareholders and the February 1992 Rights redemption and a decrease in litigation expense.
For the year 1993, the Trust recognized gains on sale of real estate of $365,000 related to the sale of three properties by SAC 9, a joint venture partnership in which the Trust owns a 30% interest.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, the Trust may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from the Trust for personal injury associated with such materials.
The Trust's management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Trust's business, assets or results of operations.
Inflation
The effects of inflation on the Trust's operations are not quantifiable. Revenues from property operations fluctuate proportionately with increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and, correspondingly, the ultimate gains to be realized by the Trust from property sales. Inflation also has an effect on the Trust's earnings from short-term investments.
Tax Matters
For the years ended December 31, 1994, 1993 and 1992, the Trust elected and in the opinion of the Trust's management, qualified to be treated as a REIT as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). To continue to qualify for federal taxation as a REIT under the Code, the Trust is required to hold at least 75% of the value of its total assets in real estate assets, government securities, cash and cash equivalents at the close of each quarter of each taxable year. The Code also requires a REIT to distribute at least 95% of its REIT taxable income plus 95% of its net income from foreclosure property, as defined in Section 857 of the Code, on an annual basis to shareholders.
Recent Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors for Impairment of a Loan", which amends SFAS No. 5 - "Accounting for Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for Troubled Debt Restructurings." The statement requires that notes receivable be considered impaired when "based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement". Impairment is to be measured either on the present value of expected future cash flows discounted at the note's effective interest rate or if the note is
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
collateral dependent, on the fair value of the collateral. In October 1994, the FASB issued SFAS No. 118 - "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" which amends SFAS No. 114. SFAS No. 118 eliminates the income recognition provisions of SFAS No. 114, substituting disclosure of the creditor's policy of income recognition on impaired notes. SFAS No. 114 and SFAS No. 118 are both effective for fiscal years beginning after December 15, 1994. The Trust's management has not fully evaluated the effects of implementing these statements, but expects that they will not affect the Trust's interest income recognition policy but may require the classification of otherwise performing loans as impaired.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All other schedules are omitted because they are not required, are not applicable or the information required is included in the Financial Statements or the notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees of Continental Mortgage and Equity Trust
We have audited the accompanying consolidated balance sheets of Continental Mortgage and Equity Trust and Subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Continental Mortgage and Equity Trust and Subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in all material respects, the information set forth therein.
BDO SEIDMAN
Dallas, Texas March 21, 1995
CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Continental Mortgage and Equity Trust and consolidated entities (the "Trust") have been prepared in conformity with generally accepted accounting principles, the most significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES". These, along with the remainder of the Notes to the Consolidated Financial Statements, are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts.
Certain balances for 1993 and 1992 have been reclassified to conform to the 1994 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. Continental Mortgage and Equity Trust ("CMET") is a California business trust organized on August 27, 1980. The Trust may invest in real estate through direct ownership, leases and partnerships and it may also invest in mortgage loans on real estate, including first, wraparound and junior mortgage loans.
Basis of consolidation. The Consolidated Financial Statements include the accounts of CMET and partnerships and subsidiaries which it controls. All intercompany transactions and balances have been eliminated.
Interest recognition on notes receivable. It is the Trust's policy to cease recognizing interest income on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of the underlying collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for estimated losses on notes receivable and properties held for sale to the extent that the investment in the notes or properties exceeds the Trust's estimate of net realizable value of the property or collateral securing each such note, or fair value of the collateral if foreclosure is probable. In estimating net realizable value, consideration is given to the current estimated collateral or property value adjusted for costs to complete or improve, hold and dispose. The cost of funds, one of the criteria used in the calculation of estimated net realizable value (approximately 5.0% and 4.7% as of December 31, 1994 and 1993, respectively), is based on the average cost of all capital. The provision for losses is based on estimates, and actual losses may vary from current estimates. Such estimates are reviewed periodically and any additional provision determined to be necessary is charged against earnings in the period in which it becomes reasonably estimable.
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed real estate held for sale. Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. After foreclosure, the excess of new cost, if any, over fair value minus estimated costs of sale is recognized in a valuation allowance. Subsequent changes in fair value either increase or decrease such valuation allowance. See "Allowance for estimated losses" above. Properties held for sale are depreciated in accordance with the Trust's established depreciation policies. See "Real estate and depreciation" below.
Annually, all foreclosed properties held for sale are reviewed by the Trust's management and a determination is made if the held for sale classification remains appropriate. The following are among the factors considered in determining that a change in classification to held for investment is appropriate: (i) the property has been held for at least one year; (ii) Trust management has no intent to dispose of the property within the next twelve months; (iii) the property is a "qualifying asset" as defined in the Internal Revenue Code of 1986, as amended; (iv) property improvements have been funded; and (v) the Trust's financial resources are such that the property can be held long-term. The subsequent classification of property previously held for sale to held for investment does not result in a restatement of previously reported revenues, expenses or net income.
Real estate and depreciation. Real estate is carried at the lower of cost or estimated net realizable value, except for foreclosed properties held for sale, which are recorded initially at the lower of original cost or fair value minus estimated costs of sale. Depreciation is provided for by the straight-line method over the estimated useful lives of the assets, which range from 5 to 40 years.
Present value premiums/discounts. The Trust provides for present value premiums and discounts on notes receivable or payable that have interest rates that differ substantially from prevailing market rates and amortizes such premiums and discounts by the interest method over the lives of the related notes. The factors considered in determining a market rate for notes receivable include the borrower's credit standing, nature of the collateral and payment terms of the note.
Revenue recognition on the sale of real estate. Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No. 66"). Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using either the deposit, the installment, the cost recovery or the financing method, whichever is appropriate.
Investment in noncontrolled partnerships. The Trust uses the equity method to account for investments in partnerships which it does not
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
control. Under the equity method, the Trust's initial investment, recorded at cost, is increased by the Trust's proportionate share of the partnership's operating income and additional advances and decreased by the Trust's share of the partnership's operating losses and distributions received.
Marketable equity securities. Marketable equity securities are considered to be available-for-sale and are carried at fair value, defined as period end closing market value. Net unrealized holding gains and losses are reported as a separate component of shareholders' equity until realized.
Fair value of financial instruments. The Trust used the following assumptions in estimating the fair value of its notes receivable, marketable equity securities and notes payable. For performing notes receivable, the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For nonperforming notes receivable, the estimated fair value of the Trust's interest in the collateral property was used. For marketable equity securities, fair value was based on the year end closing market price of each security. The estimated fair values presented do not purport to present amounts to be ultimately realized by the Trust. The amounts ultimately realized may vary significantly from the estimated fair values presented. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, the Trust considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Earnings per share. Income (loss) per share of beneficial interest is computed based upon the weighted average number of shares of beneficial interest outstanding during each year.
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CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
The Trust does not recognize interest income on nonperforming notes receivable. Notes receivable are considered to be nonperforming when they become 60 days or more delinquent. For the years 1994, 1993 and 1992, unrecognized interest income on nonperforming notes totaled $1.3 million, $681,000 and $302,000, respectively.
Notes receivable at December 31, 1994 mature from 1995 through 2018, with interest rates ranging from 6.5% to 18.0% and a weighted average rate of 7.8%. The discount is based on an imputed interest rate of 12% and premiums are based on imputed interest rates of 10%. Notes receivable are nonrecourse and are collateralized by real estate.
In May 1994, the Trust sold the retail portion of Forest Ridge, a foreclosed apartment and retail property held for sale, financing the sale through acceptance of a $365,000 purchase money mortgage. The mortgage note bears interest at a rate of 7.5% per annum for the first three years, increasing to 8.3% per annum from May 1997 until maturity in May 2001. The note requires monthly payments of principal and interest, currently $3,000. See NOTE 4. "REAL ESTATE AND DEPRECIATION."
In December 1994, the Trust received payment in full on the wraparound mortgage note secured by the Fountainview Retirement Center. The Trust received $5.0 million in cash, equal to the Trust's equity in the wraparound mortgage note.
In addition, the note agreement required that the debtor make an additional profit participation payment equal to 62.5% of the amount by which the fair market value of the property on the maturity date of the loan exceeded the original loan principal balance. In settlement of the profit participation, the borrower assigned a $1.8 million first mortgage, secured by Cypress Creek Executive Court, an office building in Ft. Lauderdale, Florida, to the Trust for which the Trust paid $283,000 in cash. The first mortgage bears interest at rates ranging from 8.0% to 9.0% per annum, requires monthly payments of principal and
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
interest, currently $15,000, and matures in June 2009. The Trust discounted the note to yield 12.0% per annum. The Trust recognized a $1.1 million gain on the settlement of the profit participation.
In September 1994, the Trust recorded the insubstance foreclosure of the Circletree Apartments and the Woodbridge Apartments, the collateral properties securing two of the Trust's mortgage notes receivable. See NOTE 4. "REAL ESTATE AND DEPRECIATION."
In July 1993, the Trust sold the English Hills Apartments and financed the sale in part through the acceptance of a $590,000 purchase money mortgage. The note bears interest at rates ranging from 8.5% to 9%, requires monthly payments of interest only from November 1993 to June 1995, payments of principal and interest thereafter and matures in June 1999. See NOTE 4. "REAL ESTATE AND DEPRECIATION."
The Trust received title to an office building and a 6 acre tract of land in Houston, Texas in settlement of a $1.2 million mortgage note receivable during 1993. This settlement resulted in no loss to the Trust. See NOTE 4. "REAL ESTATE AND DEPRECIATION."
During 1993, the Trust received cash of $1.6 million in full payment of four mortgage notes, including the related party note described in "Related party transaction" below.
In September 1991, the Trust funded a $2.0 million junior mortgage loan, secured by the Aspen Village Townhomes, located in Hartland, Wisconsin. The note accrues interest at the default interest rate of 18% per annum. The note had an extended maturity date of April 27, 1992. On March 27, 1992, the Trust funded an additional $150,000 junior lien mortgage loan, also secured by the Aspen Village Townhomes. This note also bears interest at the default interest rate of 18% per annum. This note had an extended maturity date of September 23, 1992. The borrower failed to make the required principal payments to the Trust on the maturity dates. The Trust continues to negotiate with the borrower to restructure the note, with the borrower providing additional collateral to secure these loans. If the negotiations are unsuccessful and the Trust forecloses on the collateral property, it does not anticipate incurring a loss in excess of previously established reserves.
At December 31, 1994, four other of the Trust's mortgage notes receivable with principal balances totaling $4.5 million were in default. One of the notes, with a principal balance of $1.4 million at December 31, 1994, required a principal paydown of $200,000 in November 1994, which had not been made as of March 17, 1995. The borrower is currently negotiating with the Trust for an 18 month extension of the note in return for a principal paydown and a pledge of additional collateral to secure the note. The Trust does not anticipate incurring a loss on this note as the estimated value of the property securing the note is in excess of the carrying value of the note. The Trust is
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
evaluating its options with respect to foreclosure of the collateral properties securing the remaining three notes, and the Trust does not anticipate incurring losses on these notes in excess of previously established reserves.
Related party transaction. In December 1990, the Trust funded a $1.4 million first mortgage loan to Rivertrails Development Associates, Inc., a wholly-owned subsidiary of ART, secured by 198 developed residential lots in Ft. Worth, Texas. The loan was paid in full in August 1993. The Trust's advisor also serves as advisor to ART and as of March 17, 1995, ART owned approximately 35% of the Trust's outstanding shares of beneficial interest.
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
The provision for losses in the accompanying Consolidated Statements of Operations consists of a $1.2 million write down of the carrying value of the Genesee Towers office building to the amount of the nonrecourse mortgage and a $200,000 loss on the sale of a foreclosed property held for sale in 1994, and a $221,000 loss on the sale of a foreclosed property held for sale in 1993. See NOTE 4. "REAL ESTATE AND DEPRECIATION" and NOTE 7. "NOTES AND INTEREST PAYABLE."
NOTE 4. REAL ESTATE AND DEPRECIATION
In February 1994, the Trust purchased the Fountain Lake Apartments, a 166 unit apartment complex in Texas City, Texas, for $3.3 million. The Trust paid $237,000 in cash, assumed an existing mortgage of $2.5 million and the seller provided additional financing of $402,000. The $2.5 million first mortgage bears interest at a variable rate, currently 5.9% per annum, requires monthly payments of principal and interest of $15,000 and matures in November 1998. The $402,000 seller financing is secured by a second lien mortgage on another of the Trust's properties, Windsor Plaza Office Building, in Windcrest, Texas. This mortgage bears interest at a variable rate, currently 6.6% per annum, requires monthly payments of principal and interest of $3,000 and also matures in November 1998.
In March 1994, the Trust purchased the McCallum Crossing Apartments, a 322 unit apartment complex in Dallas, Texas, for $7.7 million. The Trust paid $1.4 million in cash and the seller provided $6.3 million in mortgage financing. The mortgage bears interest at rates ranging from
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
6.5% to 7.5% per annum, requires monthly payments of interest only through March 1, 1998 and principal and interest payments of $46,000 thereafter, and matures in March 2004.
In May 1994, the Trust purchased the Willowcreek Apartments, a 112 unit apartment complex in El Paso, Texas, for $2.3 million in cash.
In June 1994, the Trust purchased the Park Avenue Apartments, a 108 unit apartment complex in Clute, Texas, for $855,000 in cash.
In August 1994, the Trust purchased the Parkwood Knoll Apartments, a 178 unit apartment complex in San Bernardino, California, for $6.4 million. The Trust paid $1.2 million in cash and assumed the existing mortgage of $5.2 million. The mortgage bears interest at a rate of 8.0% per annum, requires monthly payments of principal and interest of $40,000 and matures in February 2004.
In September 1994, the Trust purchased the Pierce Towers Apartments, a 57 unit apartment complex in Denver, Colorado, for $2.7 million. The Trust paid $678,000 in cash and assumed the existing mortgage of $2.0 million. The mortgage bears interest at a rate of 8.4% per annum, requires monthly payments of principal and interest of $15,000 and matures in December 2000.
Also in September 1994, the Trust purchased the McLeod Commerce Center, a 111,115 square foot industrial facility in Orlando, Florida, for $3.2 million. The Trust paid $1.0 million in cash and the seller provided mortgage financing of $2.2 million. The mortgage bears interest at a rate of 9.5% per annum, requires monthly payments of principal and interest of $19,000 and matures in October 2001.
In December 1994, the Trust purchased The Pines Apartments, a 242 unit apartment complex in Gainesville, Florida, for $6.2 million. The Trust paid $923,000 in cash, assumed the existing first mortgage of $2.7 million and the seller provided additional financing of $2.7 million. The first mortgage bears interest at 9.6% per annum, requires monthly payments of principal and interest of $27,000 and matures in July 2011. The $2.7 million second mortgage bears interest at 9.5% per annum, requires monthly payments of interest only through September 1995 and monthly payments of principal and interest of $23,000 thereafter, and matures in December 1997.
In February 1995, the Trust purchased the Sullyfield Commerce Center, a 243,813 square foot industrial facility in Chantilly, Virginia, for $11.0 million. The Trust paid $2.2 million in cash and the seller provided mortgage financing of $8.8 million. The mortgage bears interest at a rate of 6% per annum through December 1996 and 9% per annum thereafter, requires monthly payments of interest only through January 1999 and principal and interest payments of $73,000 thereafter, and matures in January 2001.
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In March 1995, the Trust purchased the Zane May Warehouses, six industrial warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for $5.4 million. The Trust paid $696,000 in cash, obtained new mortgage financing of $4.6 million and the seller provided additional financing of $403,000. The $4.6 million mortgage bears interest at a variable rate, currently 9.25% per annum, requires monthly payments of interest only and matures in July 1999. The $403,000 seller financings bear interest at rates ranging from 6% to 8% per annum, require monthly payments of principal and interest totaling $3,000 and mature in July 1999.
In September 1994, the Trust recorded the insubstance foreclosure of the Circletree Apartments, a 414 unit apartment complex in Waukegan, Illinois. The Circletree Apartments had an estimated fair value, less estimated costs of sale, of $8.1 million at the date of foreclosure, which approximated the carrying value of the Trust's note receivable. The foreclosure resulted in no loss to the Trust. Foreclosure proceedings were completed in October 1994.
Also in September 1994, the Trust recorded the insubstance foreclosure of Woodbridge Apartments, a 194 unit apartment complex in Westminster, Colorado. The Woodbridge Apartments had an estimated fair value, less estimated costs of sale, of $3.3 million at the date of foreclosure, which exceeded the carrying value of the Trust's mortgage note receivable. The insubstance foreclosure resulted in no loss to the Trust. Foreclosure proceedings were completed in February 1995.
In February 1994, the Trust sold the Kimberly Square Shopping Center, a foreclosed property held for sale in Fort Lauderdale, Florida, for $1.0 million in cash. No loss in excess of the reserve previously provided was incurred.
In May 1994, the Trust sold the retail portion of Forest Ridge, a foreclosed apartment and retail property held for sale in Denton, Texas. The property was sold for $365,000, with the Trust providing purchase money financing for the entire sales price. The Trust recognized neither a gain or loss on the sale. The terms of the mortgage note receivable are discussed in NOTE 3. "NOTES AND INTEREST RECEIVABLE."
In June 1994, the Trust sold a 546 acre tract of foreclosed undeveloped land held for sale in Morgan, Utah, for $110,000 in cash. No loss in excess of the reserve previously provided was incurred.
Also in June 1994, the Trust sold the Oak Forest Apartments, a foreclosed property held for sale in Tampa, Florida, for $900,000 in cash. The Trust recognized a loss on the sale of $200,000 in excess of previously provided reserves, which was provided by a direct charge against earnings. See NOTE 3. "ALLOWANCE FOR ESTIMATED LOSSES."
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In December 1994, the Trust sold two single family residences located in Arizona and South Dakota, which it had obtained through foreclosure. The Trust received $155,000 in cash from the sales. No loss in excess of the reserves previously established was incurred.
In March 1993, the Trust purchased the Fairways Apartments, a 152 unit apartment complex in Longview, Texas, for $2.1 million. The Trust paid $446,000 in cash, assumed an existing mortgage of $1.2 million and the seller provided additional financing of $480,000.
In April 1993, the Trust purchased the Country Crossing Apartments, a 227 unit apartment complex in Tampa, Florida, for $3.1 million. The Trust paid $239,000 in cash and assumed an existing mortgage of $2.7 million. The Trust also made a principal paydown of $100,000 on the mortgage on the date of acquisition.
In August 1993, the Trust purchased the Camelot Apartments, a 120 unit apartment complex in Largo, Florida, for $3.9 million. The Trust paid $757,000 in cash and assumed an existing mortgage of $3.1 million.
In November 1993, the Trust purchased the Northgate Distribution Center, a 208,386 square foot industrial facility in Marietta, Georgia, for $4.2 million. The Trust paid $889,000 in cash and obtained first mortgage financing for an additional $3.3 million.
In December 1993, the Trust purchased the Somerset Apartments, a 200 unit apartment complex in Texas City, Texas, for $3.6 million. The Trust paid $920,000 in cash and assumed an existing first mortgage of $2.7 million.
Also in 1993, the Trust obtained title, through the settlement of a mortgage note receivable, to Pinemont, a 19,685 square foot office building in Houston, Texas and title to a 6 acre tract of land also in Houston, Texas. See NOTE 2. "NOTES AND INTEREST RECEIVABLE."
In June 1993, the Trust sold Northwest Plaza, a shopping center held for sale in Duncan, Oklahoma, for $115,000 in cash. No loss in excess of the reserve previously established was incurred. In July 1993, the Trust sold English Hills Apartments, a foreclosed apartment complex held for sale in Tampa, Florida. The Trust received $47,000 in cash and provided $590,000 of purchase money financing. The Trust recognized a loss of $221,000 on the sale, which was provided by a direct charge against earnings. See NOTE 2. "NOTES AND INTEREST RECEIVABLE" and NOTE 3. "ALLOWANCE FOR ESTIMATED LOSSES."
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CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN MARKETABLE EQUITY SECURITIES
The Trust's investments in marketable equity securities consisted of the following:
The Trust's marketable equity securities are considered available-for-sale and are carried at fair value (period end market value). The Trustees of the Trust are also directors of TCI and certain officers of the Trust are also officers of ART and TCI. The President of the Trust also serves as President of TCI and as a director of ART. The Trust's advisor serves as advisor to ART and TCI. Prior to March 31, 1994, the Trust's advisor also served as advisor to NIRT.
Section 5.3(g) of the Trust's Declaration of Trust limits to 18 months the period of time that the Trust can hold an investment in an equity security. The Trust's shareholders approved an amendment to the Trust's Declaration of Trust allowing the Trust to hold these shares of ART, NIRT and TCI until July 30, 1996.
The Trust has margin arrangements with brokerage firms which provide for borrowings of up to 50% of the market value of equity securities. The borrowings under such margin arrangement are secured by equity securities of ART, NIRT and TCI and bear interest at a rate of 6.2%. Margin borrowings were $500,000 at December 31, 1994 and 1993 and are included in other liabilities in the accompanying Consolidated Balance Sheets.
NOTE 6. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investment in equity method partnerships consists of the following:
The Trust, in partnership with NIRT, owns SAC 9, which in turn currently owns two office buildings in the vicinity of Sacramento, California. The Trust has a 30% interest in the partnership's earnings, losses and distributions.
In 1993, SAC 9 sold three of its office buildings for a total of $4.5 million. SAC 9 received net cash of $2.5 million, of which the Trust's equity share was $748,000, after the payoff of an existing mortgage
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
with a principal balance of $685,000. SAC 9 also provided $356,000 of purchase money financing in conjunction with the sale of one of the buildings and provided $887,000 of purchase money financing in conjunction with the sale of another of the buildings. SAC 9 recognized gains totaling $1.2 million on the sales, of which the Trust's equity share was $365,000.
The Trust and NIRT are also partners in Income Special Associates ("ISA"), a joint venture partnership in which the Trust has a 60% interest in earnings, losses and distributions. ISA in turn owns a 100% interest in Indcon, formerly known as Adams Properties Associates, which owns 32 industrial warehouse facilities. The Indcon partnership agreement requires the consent of both the Trust and NIRT for any material changes in the operations of the partnership's properties, including sales, refinancings and changes in property management. The Trust, as a noncontrolling partner, accounts for its investment in Indcon using the equity method.
In May 1994, Indcon sold one of its industrial warehouses for $4.4 million in cash. Indcon received net cash of $2.1 million, of which the Trust's equity share was $1.3 million, after the payoff of an existing mortgage with a principal balance of $1.8 million and the payment of a $133,000 prepayment penalty. Indcon recognized a gain of $962,000 on the sale, of which the Trust's equity share was $577,000.
Set forth below are summarized financial data for the partnerships the Trust accounts for using the equity method (unaudited):
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
Scheduled principal payments on notes payable are due as follows:
Notes payable at December 31, 1994 bear interest at rates ranging from 3.0% to 10.8% and mature between 1995 and 2024. These notes payable are nonrecourse and are collateralized by deeds of trust on real estate with a carrying value of $132.1 million.
In February 1995, after determining that further investment in Genesee Towers, an office building in Flint, Michigan, could not be justified without a substantial modification of the mortgage debt, the Trust ceased making debt service payments on the $8.8 million nonrecourse mortgage secured by the property. The Trust is attempting to negotiate with the lender to modify the mortgage. However, there can be no assurance that such negotiations will be successful or that the Trust will continue to own the property. Accordingly, as of December 31, 1994, the carrying value of the property was written down by $1.2 million, which is included in the 1994 provision for losses, to the amount of the nonrecourse mortgage.
In January 1994, the Trust obtained mortgage financing secured by the previously unencumbered Park Lane Apartments in Dallas, Texas, in the amount of $1.3 million. The Trust received net cash of $1.1 million. The remainder of the financing proceeds were used to fund escrows for replacements and repairs and to pay various closing costs associated with the financing. The $1.3 million mortgage bears interest at a rate of 8.66% per annum through January 2004 and at a variable rate thereafter and requires monthly payments of principal and interest, currently $10,000. The note matures in February 2019.
In April 1994, the Trust obtained mortgage financing secured by the previously unencumbered Southgate Apartments in Roundrock, Texas, in the
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
amount of $3.0 million. The Trust received net cash of $2.9 million. The remainder of the financing proceeds were used to fund escrows for replacements and repairs and to pay various closing costs associated with the financing. The $3.0 million mortgage bears interest at a rate of 9.625% per annum, requires monthly payments of principal and interest of $26,000 and matures in May 2004.
In May 1994, the Trust obtained mortgage financing secured by the previously unencumbered 4242 Cedar Springs Apartments in Dallas, Texas, in the amount of $1.4 million. The Trust received net cash of $1.3 million after the payment of various closing costs associated with the financing. The $1.4 million mortgage bears interest at a rate of 9.9% per annum, requires monthly payments of principal and interest of $13,000 and matures in June 2004.
In July 1994, the Trust obtained new mortgage financing secured by the Stone Oak Place Apartments in San Antonio, Texas, in the amount of $3.3 million. The Trust received net cash of $577,000 after the payoff of $2.5 million in existing mortgage debt that was scheduled to mature in April 1995. The remainder of the refinancing proceeds were used to fund escrows for replacements and repairs and to pay various closing costs associated with the refinancing. The new $3.3 million mortgage bears interest at a rate of 9.9% per annum, requires monthly principal and interest payments of $31,000 and matures in August 2004.
In December 1994, the Trust obtained mortgage financing secured by the previously unencumbered Willow Creek Apartments in El Paso, Texas, in the amount of $1.8 million. The Trust received net cash of $1.6 million after the payment of various closing costs associated with the financing. The $1.8 million mortgage bears interest at a rate of 10.25% per annum, requires monthly payments of principal and interest of $17,000 and matures in January 2002.
In September 1993, the Trust obtained mortgage financing secured by the previously unencumbered El Chapparal Apartments in San Antonio, Texas, in the amount of $2.7 million. The Trust received net cash of $2.4 million. The remainder of the financing proceeds were used to fund escrows for replacements and repairs and to pay various closing costs associated with the financings.
NOTE 8. DISTRIBUTIONS
In January 1993, the Trust's Board of Trustees approved the resumption of the payment of quarterly distributions to shareholders. In 1994, the Trust paid distributions of $.60 per share of beneficial interest aggregating $1.8 million. In 1993, the Trust paid distributions of $.50 per share of beneficial interest aggregating $1.5 million.
No distributions were declared or paid in 1992.
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. DISTRIBUTIONS (Continued)
The Trust reported to the Internal Revenue Service that 100% of the distributions paid in 1994 and 1993 represented a return of capital.
NOTE 9. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as advisor to the Trust since March 28, 1989. BCM is a company owned by a trust for the benefit of the children of Gene E. Phillips. Mr. Phillips served as a Trustee of the Trust until December 31, 1992, as director of BCM until December 22, 1989 and as Chief Executive Officer of BCM until September 1, 1992. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services to the Trust.
At the Trust's annual meeting of shareholders held on March 7, 1995, the Trust's shareholders approved the renewal of the Trust's Advisory Agreement with BCM through the next annual meeting of the Trust's shareholders. Subsequent renewals of the Trust's Advisory Agreement with BCM require the approval of the Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit annually for approval by the Trust's Board of Trustees a budget and business plan for the Trust containing a twelve-month forecast of operations and cash flow, a general plan for asset sales or acquisitions, lending, foreclosure and borrowing activity, and other investments, and the Advisor is required to report quarterly to the Trust's Board of Trustees on the Trust's performance against the business plan. In addition, all transactions or investments by the Trust shall require prior approval by the Trust's Board of Trustees unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to the Advisor by the Trust's Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of Trustees for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that the Advisor shall be deemed to be in a fiduciary relationship to the Trust's shareholders; contains a broad standard governing the Advisor's liability for losses by the Trust; and contains guidelines for the Advisor's allocation of investment opportunities as among itself, the Trust and other entities it advises.
The Advisory Agreement provides for BCM to be responsible for the day-to-day operations of the Trust and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value of the Trust (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% per annum of the Trust's net income.
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
The Advisory Agreement also provides for BCM to receive an annual incentive sales fee equal to 10% of the amount, if any, by which the aggregate sales consideration for all real estate sold by the Trust during such fiscal year exceeds the sum of: (i) the cost of each such property as originally recorded in the Trust's books for tax purposes (without deduction for depreciation, amortization or reserve for losses), (ii) capital improvements made to such assets during the period owned by the Trust, and (iii) all closing costs, (including real estate commissions) incurred in the sale of such property; provided, however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8% simple annual return on the Trust's net investment including capital improvements, calculated over the Trust's holding period before depreciation and inclusive of operating income and sales consideration and (b) the aggregate net operating income from all real estate owned by the Trust for each of the prior and current fiscal years shall be at least 5% higher in the current fiscal year than in the prior fiscal year.
Additionally, pursuant to the Advisory Agreement, BCM or an affiliate of BCM is to receive an acquisition commission for supervising the acquisition, purchase or long-term lease of real estate for the Trust equal to the lesser of (i) up to 1% of the cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers or (ii) the compensation customarily charged in arm's-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property; provided that the aggregate purchase price of each property (including acquisition fees and all real estate brokerage commissions) may not exceed such property's appraised value at acquisition.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by the Trust; provided, however, that the compensation retained by BCM or any affiliate of BCM shall not exceed the lesser of (i) 2% of the amount of the loan committed by the Trust or (ii) a loan brokerage and commitment fee which is reasonable and fair under the circumstances.
The Advisory Agreement also provides that BCM or an affiliate of BCM is to receive a mortgage or loan acquisition fee with respect to the acquisition or purchase of any existing mortgage loan by the Trust equal to the lesser of (i) 1% of the amount of the loan purchased or (ii) a loan brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding by the Trust of any mortgage loan.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive a mortgage brokerage and equity refinancing fee for obtaining loans to the Trust or refinancing on Trust properties equal to the
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
lesser of (i) 1% of the amount of the loan or the amount refinanced or (ii) a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from BCM or an affiliate of BCM without the approval of the Trust's Board of Trustees. No fee shall be paid on loan extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of certain expenses incurred by it, in the performance of advisory services to the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust), all or a portion of the annual advisory fee must be refunded by the Advisor to the Trust if the Operating Expenses of the Trust (as defined in the Trust's Declaration of Trust) exceed certain limits specified in the Declaration of Trust based on the book value, net asset value and net income of the Trust during such fiscal year. The operating expenses of the Trust did not exceed such limitation in 1994, 1993 or 1992.
Additionally, if the Trust were to request that BCM render services to the Trust other than those required by the Advisory Agreement, BCM or an affiliate of BCM will be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed in NOTE 10. "PROPERTY MANAGEMENT", the Trust has hired Carmel Realty Services, Ltd. ("Carmel", Ltd.), an affiliate of BCM, to provide property management for the Trust's properties and, as discussed in NOTE 11. "REAL ESTATE BROKERAGE" the Trust has engaged Carmel Realty, Inc. ("Carmel Realty"), also an affiliate of BCM, on a non-exclusive basis, to provide brokerage services for the Trust.
NOTE 10. PROPERTY MANAGEMENT
Since February 1, 1990, affiliates of BCM have provided property management services to the Trust. Currently Carmel, Ltd. provides such property management services for a fee of 5% or less of the monthly gross rents collected on the properties under its management. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Trust at various rates. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of nine of the Trust's commercial properties and the industrial warehouse facilities owned by one of the real estate partnerships in which the Trust and NIRT are partners to Carmel Realty, which is owned by SWI. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd.
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. REAL ESTATE BROKERAGE
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the Trust and received brokerage commissions in accordance with the terms of the advisory agreement. Effective December 1, 1992, the Trust's Board of Trustees approved the non-exclusive engagement by the Trust of Carmel Realty to perform brokerage services for the Trust. Carmel Realty is entitled to receive a commission for property acquisitions and sales by the Trust in accordance with the following sliding scale of total fees to be paid by the Trust: (i) maximum fee of 5% on the first $2.0 million of any purchase or sale transaction of which no more than 4% would be paid to Carmel Realty or affiliates; (ii) maximum fee of 4% on transaction amounts between $2.0 million - $5.0 million of which no more than 3% would be paid to Carmel Realty or affiliates; (iii) maximum fee of 3% on transaction amounts between $5.0 million - $10.0 million of which no more than 2% would be paid to Carmel Realty or affiliates; and, (iv) maximum fee of 2% on transaction amounts in excess of $10.0 million of which no more than 1 1/2% would be paid to Carmel Realty or affiliates.
NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM, the Trust's advisor, and its affiliates:
________________________
* Net of property management fees paid to subcontractors, other than Carmel Realty.
NOTE 13. RENTALS UNDER OPERATING LEASES
The Trust's rental operations include the leasing of office buildings, industrial facilities and shopping centers. The leases thereon
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. RENTALS UNDER OPERATING LEASES (Continued)
expire at various dates through 2005. The following is a schedule of minimum future rentals on non-cancelable operating leases as of December 31, 1994:
NOTE 14. INCOME TAXES
For the years 1994, 1993 and 1992, the Trust has elected and qualified to be treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and as such, will not be taxed for federal income tax purposes on that portion of its taxable income which is distributed to shareholders, provided that at least 95% of its REIT taxable income, plus 95% of its taxable income from foreclosure property as defined in Section 857 of the Code, is distributed. See NOTE 8. "DISTRIBUTIONS."
The Trust had a loss for federal income tax purposes in 1994, 1993 and 1992; therefore, the Trust recorded no provision for income taxes.
The Trust's tax basis in its net assets differs from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, the difference in the allowance for estimated losses, depreciation on owned properties and investments in joint venture partnerships. At December 31, 1994, the Trust's tax basis in its net assets exceeded its basis for financial statement purposes by $2.1 million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes, and the Trust would be able to maintain its REIT status without distributing 95% of its financial statement income. Additionally, at December 31, 1994, the Trust had a tax net operating loss carryforward of $50.5 million expiring through 2009.
As a result of the Trust's election to be treated as a REIT for income tax purposes and of its intention to distribute its taxable income, if any, in future years, no deferred tax asset, liability or valuation allowance was recorded.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Olive Litigation. In February 1990, the Trust, together with Income Opportunity Realty Trust ("IORT"), NIRT and TCI, three real estate entities with, at the time, the same officers, directors or trustees and advisor as the Trust, entered into a settlement of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al. relating to the operation and management of each of the entities. On April 23, 1990, the court granted final approval of the terms of the settlement.
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
On May 4, 1994, the parties entered into a Modification of Stipulation of Settlement dated April 27, 1994 (the "Modification") which settled subsequent claims of breaches of the settlement which were asserted by the plaintiffs and modified certain provisions of the April 1990 settlement. The Modification was preliminarily approved by the court on July 1, 1994 and final court approval was entered on December 12, 1994. The effective date of the Modification is January 11, 1995.
The Modification, among other things, provided for the addition of three new unaffiliated members to the Trust's Board of Trustees and sets forth new requirements for the approval of any transactions with affiliates over the next five years. In addition, BCM, the Trust's advisor, Mr. Phillips and William S. Friedman, the President and Trustee of the Trust until February 24, 1994, President of BCM until May 1, 1993 and director of BCM until December 22, 1989, agreed to pay a total of $1.2 million to the Trust, IORT, NIRT and TCI, of which the Trust's share is $750,000. The Trust received $187,000 in May 1994. The remaining $563,000 is to be paid in 18 monthly installments which began February 1, 1995.
Under the Modification, the Trust, IORT, NIRT, TCI and their shareholders released the defendants from any claims relating to the plaintiffs' allegations. The Trust, IORT, NIRT and TCI also agreed to waive any demand requirement for the plaintiffs to pursue claims on behalf of each of them against certain persons or entities. The Modification also requires that any shares of the Trust held by Messrs. Phillips, Friedman or their affiliates shall be (i) voted in favor of the reelection of all current members of the Trust's Board of Trustees that stand for reelection during the two calendar years following the effective date of the Modification and (ii) voted in favor of all new members of the Trust's Board of Trustees appointed pursuant to the terms of the Modification that stand for reelection during the three calendar years following the effective date of the Modification.
Pursuant to the terms of the Modification, any related party transaction which the Trust may enter into prior to April 27, 1999, will require the unanimous approval of the Trust's Board of Trustees. In addition, related party transactions may only be entered into in exceptional circumstances and after a determination by the Trust's Board of Trustees that the transaction is in the best interests of the Trust and that no other opportunity exists that is as good as the opportunity presented by such transaction.
The Modification also terminated a number of the provisions of the settlement, including the requirement that the Trust, IORT, NIRT and TCI maintain a Related Party Transaction Committee and a Litigation Committee of their respective Boards. The court retained jurisdiction to enforce the Modification.
CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
Other litigation. The Trust is also involved in various lawsuits arising in the ordinary course of business. The Trust's management is of the opinion that the outcome of these lawsuits would have no material impact on the Trust's financial condition.
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1994
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) December 31, 1994
CONTINENTAL MORTGAGE AND EQUITY TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) December 31, 1994
_____________________________
(1) The aggregate cost for federal income tax purposes is $165,261.
SCHEDULE III (Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE IV
CONTINENTAL MORTGAGE AND EQUITY TRUST MORTGAGE LOANS ON REAL ESTATE December 31, 1994
SCHEDULE IV (Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST MORTGAGE LOANS ON REAL ESTATE December 31, 1994
__________________________
(1) The aggregate cost for federal income tax purposes is $11,696.
SCHEDULE IV (Continued)
CONTINENTAL MORTGAGE AND EQUITY TRUST MORTGAGE LOANS ON REAL ESTATE
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
___________________________________
PART III
ITEM 10.
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Trustees
The affairs of Continental Mortgage and Equity Trust (the "Trust" or the "Registrant") are managed by a seven- member Board of Trustees. The Trustees are elected at the annual meeting of shareholders or appointed by the incumbent Board of Trustees and serve until the next annual meeting of shareholders or until a successor has been elected or approved.
The Trustees of the Trust are listed below, together with their ages, terms of service, all positions and offices with the Trust or its advisor, Basic Capital Management, Inc. ("BCM" or the "Advisor") their principal occupations, business experience and directorships with other companies during the last five years or more. The designation "Affiliated", when used below with respect to a Trustee, means that the Trustee is an officer, director or employee of the Advisor or an officer or employee of the Trust. The designation "Independent", when used below with respect to a Trustee, means that the Trustee is neither an officer or employee of the Trust nor a director, officer or employee of the Advisor, although the Trust may have certain business or professional relationships with such Trustee as discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business Relationships".
GEOFFREY C. ETNIRE: Age 46, Trustee (Independent) (since January 1993).
Attorney engaged in private practice of real estate law in Pleasanton, California (since 1981); Licensed Real Estate Broker in California (since 1985); Director (1985 to 1989) of Mission Valley Bancorp; Director (1984 to 1989) and Chairman (1986 to 1989) of Bank of Pleasanton; Managing Partner (1981 to 1988) with Smith, Etnire, Polson & Scott law firm; Trustee (January 1993 to March 1995) of National Income Realty Trust ("NIRT"); Trustee (since January 1993) of Income Opportunity Realty Trust ("IORT"); and Director (since January 1993) of Transcontinental Realty Investors, Inc. ("TCI").
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Trustees (Continued)
HAROLD FURST, PH.D.: Age 78, Trustee (Independent) (since January 1995).
Executive Vice President (since 1992) of SONY Signatures; Independent business consultant (since 1975) with emphasis on economic and financial matters; President (1973 to 1975) of Gerson Bakar & Associates, a property development, ownership and management company; Former Senior Vice President of Bank of America, N.T. and S.A. (retired 1972); Trustee (since January 1995) of IORT; and Director (since January 1995) of TCI.
JOHN P. PARSONS: Age 66, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1984) of Pierpont Corporation; Director of Zentrum Holdings Limited (NZ) (since 1984), the Pickford Foundation (since 1980), International Divertissments, Ltd. (since 1986), and Lifehouse International, Ltd.(since 1990); Trustee (since January 1995) of IORT; and Director (since January 1995) of TCI.
BENNETT B. SIMS: Age 62, Trustee (Independent) (since April 1990).
Producer (since January 1994) for Blue Train Pictures; Author (since 1964); Screen and Television Writer (since 1960); Independent Marketing Consultant (since 1980) for various companies; Professor of Dramatic Writing (since September 1987) at Tisch School of the Arts, New York University; Trustee (April 1990 to August 1994) of NIRT; Trustee (December 1992 to August 1994) of Vinland Property Trust ("VPT"); Trustee (since April 1990) of IORT; and Director (since April 1990) of TCI.
TED P. STOKELY: Age 61, Trustee (Independent) (since April 1990) and Chairman of the Board (since January 1995).
General Manager (since January 1993) of Minority and Elderly Housing Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid Consultant (since January 1993) and paid Consultant (April 1992 to December 1992) of Eldercare Housing Foundation ("Eldercare"), a nonprofit corporation engaged in the acquisition of low income and elderly housing; President (April 1992 to April 1994) of PSA Group (real estate management and consulting); Executive Vice President (1987 to 1991) of Key Companies Inc., a publicly traded company that develops, acquires and sells water and minerals; Trustee (April 1990 to August 1994) of NIRT; Trustee (since April 1990) and Chairman of the Board (since January 1995) of IORT; and Director (since April 1990) and Chairman of the Board (since January 1995) of TCI.
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Trustees (Continued)
MARTIN L. WHITE: Age 55, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1993) of North American Trading Company Ltd.; President and Chief Operating Officer (since 1992) of Community Based Developers, Inc.; Development Officer and Loan Manager (1986 to 1992) of the City of San Jose, California; Vice President and Director of Programs (1967 to 1986) of Arpact, Inc., a government contractor for small business development and trade; Trustee (since January 1995) of IORT; and Director (since January 1995) of TCI.
EDWARD G. ZAMPA: Age 60, Trustee (Independent) (since January 1995).
General Partner (since 1976) of Edward G. Zampa and Company; Trustee (since January 1995) of IORT; and Director (since January 1995) of TCI.
Litigation and Claims Involving Mr. Phillips
Gene E. Phillips served as a Trustee of the Trust until December 22, 1992, and as a director until December 31, 1989 and Chief Executive Officer until September 1, 1992 of BCM. Although Mr. Phillips no longer serves as an officer or director of BCM or as a Trustee of the Trust, he does serve as a representative of the trust established for the benefit of his children which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services for the Trust.
Southmark Bankruptcy. Until January 1989, Mr. Phillips served as Chairman of the Board and Director (since 1980) and President and Chief Executive Officer (since 1981) of Southmark Corporation ("Southmark"). As a result of a deadlock on Southmark's Board of Directors, Mr. Phillips, among others, reached an agreement with Southmark on January 17, 1989, whereby Mr. Phillips resigned his positions with Southmark and certain of Southmark's subsidiaries and affiliates. Southmark filed a voluntary petition in bankruptcy under Chapter 11 of the United States Bankruptcy Code on July 14, 1989.
San Jacinto Savings Association. On November 30, 1990, San Jacinto Savings Association ("SJSA"), a savings institution that had been owned by Southmark since 1983 and for which Mr. Phillips served as a director from 1987 to January 1989, was placed under conservatorship of the Resolution Trust Corporation ("RTC") by federal banking authorities. On December 14, 1990, SJSA was converted into a Federal Association and placed in receivership. On November 26, 1993, the RTC filed lawsuits in Dallas and New York City against Mr. Phillips, six former directors, auditors and lawyers of SJSA, alleging that the auditors and former directors could and should have stopped SJSA's poor lending practice during the period it was owned by Southmark and that the former
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Litigation and Claims Involving Mr. Phillips (Continued)
directors abdicated their responsibility for reviewing loans during the same period. The Office of Thrift Supervision ("OTS") also conducted a formal examination of SJSA and its affiliates.
On November 21, 1994, Mr. Phillips entered into an agreement with the RTC and OTS settling all claims relating to his involvement with SJSA.
Litigation Against Southmark and its Affiliates Alleging Fraud or Mismanagement. There were several lawsuits filed against Southmark, its former officers and directors (including Mr. Phillips) and others, alleging, among other things, that such persons and entities engaged in conduct designed to defraud and mislead the investing public by intentionally misrepresenting the financial condition of Southmark. All such lawsuits have been settled or dismissed without any findings or admissions of wrongdoing by Mr. Phillips. THE TRUST WAS NOT A DEFENDANT IN ANY OF THESE LAWSUITS.
Litigation Relating to Lincoln Savings and Loan Association, F.A. In an action filed in the United States District Court for the District of Arizona on behalf of Lincoln Savings and Loan Association, F. A. ("Lincoln"), and captioned RTC v. Charles H. Keating, Jr., et al., the RTC alleged that Charles H. Keating, Jr. and other persons, including Mr. Phillips, fraudulently diverted funds from Lincoln.
The RTC alleged that Mr. Phillips aided and abetted the insider defendants in a scheme to defraud Lincoln and its regulators; that Southmark, its subsidiaries and affiliates, including SJSA, facilitated and concealed the use of Lincoln funds to finance the sale, at inflated prices, of assets of Lincoln's parent, American Continental Corp. ("ACC"), in return for loans from Lincoln and participations in contrived transactions; and that the insider defendants caused Southmark to purchase ACC assets at inflated prices. The RTC alleged that Lincoln and/or ACC engaged in three illegal transactions with Southmark or its affiliates while Mr. Phillips was affiliated with Southmark. Southmark was not a defendant in this action.
The RTC alleged nine separate causes of action against Mr. Phillips, including aiding and abetting the violation of, and conspiracy to violate, federal and state Racketeer Influenced and Corrupt Organizations Act ("RICO") statutes, violations of Arizona felony statutes, common law fraud, civil conspiracy and breach of fiduciary duty. The RTC sought to recover from the defendants more than $1 billion, as well as treble damages under the federal RICO statute, punitive damages of at least $100 million and attorneys' fees and costs.
On November 21, 1994, Mr. Phillips entered into an agreement with the RTC settling all claims relating to his involvement with Lincoln.
Southmark Partnership Litigation. One of Southmark's principal businesses was real estate syndication, and from 1981 to 1987 Southmark
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Litigation and Claims Involving Mr. Phillips (Continued)
raised over $500 million in investments from limited partners of several hundred limited partnerships. The following two lawsuits related to and involved such activities.
In an action filed in May 1992 in a Texas state court captioned HCW Pension Real Estate Fund, et al. v. Phillips et al., the plaintiffs, fifteen former Southmark related public limited partnerships, alleged that the defendants violated the partnership agreements by charging certain administrative costs and expenses to the plaintiffs. The complaint alleged claims for breach of fiduciary duty, fraud and conspiracy to commit to fraud and sought to recover actual damages of approximately $12.6 million plus punitive damages and attorneys' fees and costs. The defendants included, among others, Mr. Phillips. In October 1993, the court granted partial summary judgment in favor of Mr. Phillips on the plaintiffs' breach of fiduciary duty claims. Notice of non-suit in favor of Mr. Phillips was entered on March 9, 1994.
In an action filed in January 1993 in a Michigan state court captioned Van Buren Associates Limited Partnership, et al. v. Friedman, et al., the plaintiff, a former Southmark sponsored limited partnership, alleged a claim for breach of fiduciary duty in connection with the 1988 transfer of certain property by the partnership. The plaintiff sought damages in an unspecified amount, plus costs and attorneys' fees. The plaintiff also sought to quiet title to the property at issue. The defendants included, among others, Mr. Phillips. The lawsuit was settled in November 1994.
Board Committees
The Trust's Board of Trustees held eleven meetings during 1994. For such year, no incumbent Trustee attended fewer than 75% of the aggregate of (i) the total number of meetings held by the Board of Trustees during the period for which he had been a Trustee and (ii) the total number of meetings held by all committees of the Board of Trustees on which he served during the period that he served, except for Willie K. Davis and Randall K. Gonzalez, who each attended only one of the meetings held by the Audit Committee.
The Trust's Board of Trustees has an Audit Committee, the function of which is to review the Trust's operating and accounting procedures. The current members of the Audit Committee, all of whom are Independent Trustees, are Messrs. Etnire (Chairman), Parsons, Stokely and White. The Audit Committee met twice during 1994.
The Trust's Board of Trustees does not have Nominating or Compensation Committees.
Until January 11, 1995, the Trust's Board of Trustees had a Related Party Transaction Committee which reviewed and made recommendations to the Board of Trustees with respect to transactions involving the Trust
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Board Committees (Continued)
and any other party or parties related to or affiliated with the Trust, any of its Trustees or any of their affiliates, and a Litigation Committee which reviewed litigation involving Mr. Phillips. The members of each such committee were Independent Trustees of the Trust. During 1994, the Related Party Transaction Committee met eight times and the Litigation Committee met four times.
The Litigation Committee evaluated the nature and quality of the allegations made in any litigations or investigations involving Mr. Phillips in order to assess whether BCM should continue to act as the advisor to the Trust. The Litigation Committee, while not needing to duplicate the adjudicatory process, was required to conduct any investigation that was appropriate and necessary to discharge the above obligations.
The Related Party Transaction Committee and the Litigation Committee were formed in 1990 pursuant to the settlement of the Olive litigation, as more fully discussed in ITEM 3. "LEGAL PROCEEDINGS - Olive Litigation." In December 1994, the court approved a Modification of Stipulation of Settlement which relieved the Trust of the requirement to maintain the two committees. Accordingly, both of the committees were terminated by the Trust's Board of Trustees on January 11, 1995.
Executive Officers
The following persons currently serve as executive officers of the Trust: Oscar W. Cashwell, President; Karl L. Blaha, Executive Vice President and Director of Commercial Management; Bruce A. Endendyk, Executive Vice President; Randall M. Paulson, Executive Vice President; and Hamilton P. Schrauff, Executive Vice President and Chief Financial Officer. Their positions with the Trust are not subject to a vote of shareholders. Their ages, terms of service, all positions and offices with the Trust or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below.
OSCAR W. CASHWELL: Age 67, President (since February 1994).
President (since February 1994) of IORT and TCI; President and Director of Property and Asset Management (since January 1994) and Assistant to the President, Real Estate Operations (July 1989 to December 1993) of BCM; President (since February 1994) and Director (since March 1994) of Syntek Asset Management, Inc. ("SAMI"), the managing general partner of Syntek Asset Management, L.P. ("SAMLP"), which is the general partner of National Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), and a company owned by BCM; Assistant to the President, Real Estate Operations (March 1982 to June 1989) of Southmark; and Director (since November 1992) of American Realty Trust, Inc. ("ART").
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Executive Officers (Continued)
KARL L. BLAHA: Age 46, Executive Vice President and Director of Commercial Management (since April 1992).
President (since October 1993) and Executive Vice President and Director of Commercial Management (April 1992 to September 1993) of ART; Executive Vice President and Director of Commercial Management (since April 1992) of BCM, SAMI, IORT and TCI; Executive Vice President (since October 1992) of Carmel Realty, Inc. ("Carmel Realty"), a company owned by Syntek West, Inc. ("SWI"); Executive Vice President and Director of Commercial Management (April 1992 to February 1994) of NIRT and VPT; Partner - Director of National Real Estate Operations of First Winthrop Corporation (August 1988 to March 1992); Corporate Vice President of Southmark (April 1984 to August 1988); and President of Southmark Commercial Management (March 1986 to August 1988).
BRUCE A. ENDENDYK: Age 46, Executive Vice President (since January 1995).
President (since January 1995) of Carmel Realty; Executive Vice President (since January 1995) of BCM, SAMI, ART, IORT and TCI; Management Consultant (November 1990 to December 1994); Executive Vice President (January 1989 to November 1990) of Southmark; President and Chief Executive Officer (March 1988 to January 1989) of Southmark Equities Corporation; and Vice President/Resident Manager (December 1975 to March 1988) of Coldwell Banker Commercial/Real Estate Services in Houston, Texas.
RANDALL M. PAULSON: Age 48, Executive Vice President (since January 1995).
Executive Vice President (since January 1995) of SAMI, ART, IORT and TCI and (since October 1994) of BCM; Vice President (1993 to 1994) of GSSW, LP, a joint venture of Great Southern Life and Southwestern Life; Vice President (1990 to 1993) of Property Company of America Realty, Inc.; President (1990) of Paulson Realty Group; President (1983 to 1989) of Johnstown Management Company; and Vice President (1979 to 1982) of Lexton-Ancira.
HAMILTON P. SCHRAUFF: Age 59, Executive Vice President and Chief Financial Officer (since October 1991).
Executive Vice President and Chief Financial Officer (since October 1991) of BCM, SAMI, ART, IORT and TCI; Executive Vice President and Chief Financial Officer (October 1991 to February 1994) of NIRT and VPT; Executive Vice President - Finance of Partnership Investments, Hallwood Group (December 1990 to October 1991); Vice President - Finance and Treasurer (Octobe 1980 to October 1990) and Vice President - Finance (November 1976 to September 1980) of Texas Oil & Gas Corporation; and Assistant Treasurer - Finance Manager (February 1975 to October 1976) of Exxon U.S.A.
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Officers
Although not executive officers of the Trust, the following persons currently serve as officers of the Trust: Thomas A. Holland, Senior Vice President and Chief Accounting Officer; Robert A. Waldman, Senior Vice President, General Counsel and Secretary; and Drew D. Potera, Treasurer. Their positions with the Trust are not subject to a vote of shareholders. Their ages, terms of service, all positions and offices with the Trust or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below.
THOMAS A. HOLLAND: Age 52, Senior Vice President and Chief Accounting Officer (since July 1990).
Senior Vice President and Chief Accounting Officer (since July 1990) of BCM, SAMI, ART, IORT and TCI; Senior Vice President and Chief Accounting Officer (July 1990 to February 1994) of NIRT and VPT; Vice President and Controller (December 1986 to June 1990) of Southmark; Vice President-Finance (January 1986 to December 1986) of Diamond Shamrock Chemical Company; Assistant Controller (May 1976 to January 1986) of Maxus Energy Corporation (formerly Diamond Shamrock Corporation); Trustee (August 1989 to June 1990) of Arlington Realty Investors; and Certified Public Accountant (since 1970).
ROBERT A. WALDMAN: Age 42, Senior Vice President and General Counsel (since January 1995), Vice President (December 1990 to January 1995) and Secretary (since December 1993).
Senior Vice President and General Counsel (since January 1995); Vice President (December 1990 to January 1995) and Secretary (since December 1993) of IORT and TCI; Senior Vice President and General Counsel (since January 1995), Vice President (January 1993 to January 1995) and Secretary (since December 1989) of ART; Senior Vice President and General Counsel (since November 1994), Vice President and Corporate Counsel (November 1989 to November 1994) and Secretary (since November 1989) of BCM; Senior Vice President and General Counsel (since January 1995), Vice President (April 1990 to January 1995) and Secretary (since December 1990) of SAMI; Vice President (December 1990 to February 1994) and Secretary (December 1993 to February 1994) of NIRT and VPT; Director (February 1987 to October 1989) and General Counsel and Secretary (1985 to October 1989) of Red Eagle Resources Corporation (oil and gas); Assistant General Counsel, Senior Staff Attorney and Staff Attorney (1981 to 1985) of Texas International Company (oil and gas); and Staff Attorney (1979 to 1981) of Iowa Beef Processors, Inc.
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
Officers (Continued)
DREW D. POTERA: Age 35, Treasurer (since December 1990).
Treasurer (since December 1990) of IORT and TCI; Treasurer (since August 1991) and Assistant Treasurer (December 1990 to August 1991) of ART; Vice President, Treasurer and Securities Manager (since July 1990) of BCM; Vice President and Treasurer (since February 1992) of SAMI; Treasurer (December 1990 to February 1994) of NIRT and VPT; and Financial Consultant with Merrill Lynch, Pierce, Fenner & Smith Incorporated (June 1985 to June 1990).
In addition to the foregoing officers, the Trust has several vice presidents and assistant secretaries who are not listed herein.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the Trust's Trustees, executive officers, and any persons holding more than ten percent of the Trust's shares of beneficial interest are required to report their ownership of the Trust's shares and any changes in that ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established and the Trust is required to report any failure to file by these dates during 1994. All of these filing requirements were satisfied by its Trustees and executive officers and ten percent holders. In making these statements, the Trust has relied on the written representations of its incumbent Trustees and executive officers and its ten percent holders and copies of the reports that they have filed with the Commission.
The Advisor
Although the Trust's Board of Trustees is directly responsible for managing the affairs of the Trust and for setting the policies which guide it, the day-to-day operations of the Trust are performed by a contractual advisor under the supervision of the Trust's Board of Trustees. The duties of the advisor include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities for the Trust. The advisor also serves as a consultant to the Trusts' Board of Trustees in connection with the business plan and investment policy decisions.
BCM has served as the Trust's advisor since March 1989. BCM is a corporation of which Messrs. Cashwell, Blaha, Endendyk, Paulson and Schrauff serve as executive officers. BCM is owned by a trust for the benefit of the children of Mr. Phillips. Prior to December 22, 1989, Mr. Phillips also served as a director of BCM, and until September 1, 1992, as Chief Executive Officer of BCM. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services to the Trust.
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
The Advisor (Continued)
At the Trust's annual meeting of shareholders held on March 7, 1995, the Trust's shareholders approved the renewal of the Trust's Advisory Agreement with BCM through the next annual meeting of the Trust's shareholders. Subsequent renewals of the Trust's Advisory Agreement with BCM require the approval of the Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit annually for approval by the Trust's Board of Trustees a budget and business plan for the Trust containing a twelve-month forecast of operations and cash flow, a general plan for asset sales or acquisitions, lending, foreclosure and borrowing activity, and other investments, and the Advisor is required to report quarterly to the Trust's Board of Trustees on the Trust's performance against the business plan. In addition, all transactions or investments by the Trust shall require prior approval by the Trust's Board of Trustees unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to the Advisor by the Trust's Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of Trustees for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that the Advisor shall be deemed to be in a fiduciary relationship to the Trust's shareholders; contains a broad standard governing the Advisor's liability for losses by the Trust; and contains guidelines for the Advisor's allocation of investment opportunities as among itself, the Trust and other entities it advises.
The Advisory Agreement provides for BCM to be responsible for the day-to-day operations of the Trust and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value of the Trust (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive sales fee equal to 10% of the amount, if any, by which the aggregate sales consideration for all real estate sold by the Trust during such fiscal year exceeds the sum of: (i) the cost of each such property as originally recorded in the Trust's books for tax purposes (without deduction for depreciation, amortization or reserve for losses), (ii) capital improvements made to such assets during the period owned by the Trust, and (iii) all closing costs, (including real estate commissions) incurred in the sale of such property; provided, however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8% simple annual return on the Trust's net investment including capital improvements, calculated over the Trust's holding period before depreciation and inclusive of operating income and sales consideration and (b) the aggregate net
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
The Advisor (Continued)
operating income from all real estate owned by the Trust for each of the prior and current fiscal years shall be at least 5% higher in the current fiscal year than in the prior fiscal year.
Additionally, pursuant to the Advisory Agreement, BCM or an affiliate of BCM is to receive an acquisition commission for supervising the acquisition, purchase or long-term lease of real estate for the Trust equal to the lesser of (i) up to 1% of the cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers or (ii) the compensation customarily charged in arm's-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property; provided that the aggregate purchase price of each property (including acquisition fees and all real estate brokerage commissions) may not exceed such property's appraised value at acquisition.
The Advisory Agreement requires BCM or any affiliate of BCM to pay to the Trust one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by the Trust; provided, however, that the compensation retained by BCM or any affiliate of BCM shall not exceed the lesser of (i) 2% of the amount of the loan committed by the Trust or (ii) a loan brokerage and commitment fee which is reasonable and fair under the circumstances.
The Advisory Agreement also provides that BCM or an affiliate of BCM is to receive a mortgage or loan acquisition fee with respect to the acquisition or purchase of any existing mortgage loan by the Trust equal to the lesser of (i) 1% of the amount of the loan purchased or (ii) a loan brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding by the Trust of any mortgage loan.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive a mortgage brokerage and equity refinancing fee for obtaining loans to the Trust or refinancing on Trust properties equal to the lesser of (i) 1% of the amount of the loan or the amount refinanced or (ii) a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from BCM or an affiliate of BCM without the approval of the Trust's Board of Trustees. No fee shall be paid on loan extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of certain expenses incurred by it, in the performance of advisory services to the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust), all or a portion of the annual advisory fee must be refunded by the Advisor to the Trust if the Operating Expenses of the Trust (as defined in the Trust's Declaration of Trust) exceed certain limits specified in the Declaration of Trust based on the book value, net asset
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
The Advisor (Continued)
value and net income of the Trust during such fiscal year. The operating expenses of the Trust did not exceed such limitation in 1994, 1993 or 1992.
Additionally, if the Trust were to request that BCM render services to the Trust other than those required by the Advisory Agreement, BCM or an affiliate of BCM will be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed below, under "Property Management", the Trust has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM, to provide property management for the Trust's properties. Also as discussed below, under "Real Estate Brokerage" the Trust has engaged Carmel Realty, also an affiliate of BCM, on a non-exclusive basis, to perform brokerage services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of the Trust.
The directors and principal officers of BCM are set forth below.
Ryan T. Phillips is Gene E. Phillips' son. Gene E. Phillips serves as a representative of the trust established for the benefit of his
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT (Continued)
The Advisor (Continued)
children which owns BCM and, in such capacity, Mr. Phillips has substantial contact with the management of BCM and input with respect to its performance of advisory services to the Trust.
Property Management
Since February 1, 1990, affiliates of BCM have provided property management services to the Trust. Currently Carmel, Ltd. provides such property management services for a fee of 5% or less of the monthly gross rents collected on the properties under its management. Carmel, Ltd. subcontracts with other entities for the provision of the property-level management services to the Trust at various rates. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and, (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of nine of the Trust's commercial properties and the industrial warehouse facilities owned by one of the real estate partnerships in which the Trust and NIRT are partners to Carmel Realty which is a company owned by SWI. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd.
Real Estate Brokerage
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the Trust and received brokerage commissions in accordance with the terms of the advisory agreement. Effective December 1, 1992, the Trust's Board of Trustees approved the non-exclusive engagement by the Trust of Carmel Realty to perform brokerage services for the Trust. Carmel Realty is entitled to receive a commission for property acquisitions and sales by the Trust in accordance with the following sliding scale of total fees to be paid by the Trust: (i) maximum fee of 5% on the first $2.0 million of any purchase or sale transaction of which no more than 4% would be paid to Carmel Realty or affiliates; (ii) maximum fee of 4% on transaction amounts between $2.0 million - $5.0 million of which no more than 3% would be paid to Carmel Realty or affiliates; (iii) maximum fee of 3% on transaction amounts between $5.0 million - $10.0 million of which no more than 2% would be paid to Carmel Realty or affiliates; and, (iv) maximum fee of 2% on transaction amounts in excess of $10.0 million of which no more than 1 1/2% would be paid to Carmel Realty or affiliates.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Trust has no employees, payroll or benefit plans and pays no compensation to the executive officers of the Trust. The executive officers of the Trust who are also officers or employees of BCM, the Trust's Advisor, are compensated by the Advisor. Such executive officers of the Trust perform a variety of services for the Advisor and the
ITEM 11. EXECUTIVE COMPENSATION (Continued)
amount of their compensation is determined solely by the Advisor. BCM does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See Item 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor" for a more detailed discussion of the compensation payable to BCM by the Trust.
The only remuneration paid by the Trust is to the Trustees who are not officers or directors of BCM or its affiliated companies. The Independent Trustees (i) review the business plan of the Trust to determine that it is in the best interest of the Trust's shareholders, (ii) review the Trust's contract with the advisor, (iii) supervise the performance of the Trust's advisor and review the reasonableness of the compensation which the Trust pays to its advisor in terms of the nature and quality of services performed, (iv) review the reasonableness of the total fees and expenses of the Trust and (v) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired by the Trust. The Independent Trustees receive compensation in the amount of $6,000 per year, plus reimbursement for expenses. In addition, each Independent Trustee receives (i) $3,000 per year for each committee of the Trust's Board of Trustees on which he serves, (ii) $2,500 per year for each committee chairmanship and (iii) $1,000 per day for any special services rendered by him to the Trust outside of his ordinary duties as Trustee, plus reimbursement of expenses.
During 1994, the Trust's Board of Trustees established a Screening Committee for the purpose of interviewing candidates for nomination to the Trust's Board of Trustees pursuant to the Modification of Stipulation of Settlement of the Olive Litigation. In connection with such services each member of the Screening Committee received a $5,000 fee.
During 1994, $91,500 was paid to the Independent Trustees in total Trustees' fees for all services, including the annual fee for service during the period June 1, 1994 through May 31, 1995, and 1994 special service fees as follows: Willie K. Davis, $13,250; Geoffrey C. Etnire, $16,250; Randall K. Gonzalez, $10,500; Dan L. Johnston, $8,500; A. Bob Jordan, $10,250; Raymond V.J. Schrag, $8,750; Bennett B. Sims, $12,000; and Ted P. Stokely, $12,000.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Performance Graph
The following performance graph compares the cumulative total shareholder return on the Trust's shares of beneficial interest with the Standard & Poor's 500 Stock Index ("S&P 500 Index") and the National Association of Real Estate Investment Trusts, Inc. Hybrid REIT Total Return Index ("REIT Index"). The comparison assumes that $100 was invested on December 31, 1989 in the Trust's shares of beneficial interest and in each of the indices and further assumes the reinvestment of all dividends. Past performance is not necessarily an indicator of future performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
(CHART)
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets forth the ownership of the Trust's shares of beneficial interest, both beneficially and of record, both individually and in the aggregate, for those persons or entities known by the Trust to be beneficial owners of more than 5% of its shares of beneficial interest as of the close of business on March 17, 1995.
_________________________
(1) Percentages are based upon 2,918,121 shares of beneficial interest outstanding at March 17, 1995.
Security Ownership of Management. The following table sets forth the ownership of the Trust's shares of beneficial interest, both beneficially and of record, both individually and in the aggregate for the Trustees and executive officers of the Trust as of the close of business on March 17, 1995.
___________________________
* Less than 1%.
(1) Percentage is based upon 2,918,121 shares of beneficial interest issued and outstanding at March 17, 1995.
(2) Includes 1,029,010 shares owned by ART and 237,699 shares owned by BCM of which the executive officers of the Trust may be deemed to be beneficial owners by virtue of their positions as executive officers or director of ART and BCM. The Trust's executive officers disclaim beneficial ownership of such shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Trust's Board of Trustees voted to retain BCM as the Trust's advisor. See ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor." BCM is a company of which Messrs. Cashwell, Blaha, Endendyk, Paulson and Schrauff serve as executive officers. Mr. Phillips served as a director of BCM until December 22, 1989 and as Chief Executive Officer of BCM until September 1, 1992. BCM is owned by a trust for the benefit of the children of Mr. Phillips. Mr. Phillips serves as a representative of his children's trust which owns BCM and, in such capacity, has substantial contact with the management of BCM and input with respect to its performance of advisory services to the Trust.
Since February 1, 1991, affiliates of BCM have provided property management services to the Trust. Currently, Carmel, Ltd. provides such property management services. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of nine of the Trust's commercial properties and the industrial warehouse facilities owned by one of the real estate partnerships in which the Trust and NIRT are partners to Carmel Realty, which is a company owned by SWI.
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the Trust and received brokerage commissions in accordance with the advisory agreement. Since December 1, 1992, the Trust has engaged, on a non-exclusive basis, Carmel Realty to perform brokerage services to the Trust. Carmel Realty is a company owned by SWI.
The Trustees and officers of the Trust also serve as trustees or directors and officers of IORT and TCI. The Trustees owe fiduciary duties to such entities as well as to the Trust under applicable law. IORT and TCI have the same relationship with BCM as the Trust. Mr. Phillips is a general partner of SAMLP, the general partner of NRLP and NOLP. BCM performs certain administrative functions for NRLP and NOLP on a cost-reimbursement basis. BCM also serves as advisor to ART. Mr. Phillips served as Chairman of the Board and as a director of ART until November 16, 1992. Messrs. Blaha, Endendyk, Paulson and Schrauff serve as executive officers of ART and Mr. Cashwell serves as a director of ART.
From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid Consultant and since January 1, 1993 as a part-time unpaid Consultant for Eldercare, a nonprofit corporation engaged in the acquisition of low income and elderly housing. Eldercare has a revolving loan commitment from SWI, of which Mr. Phillips is the sole shareholder. Eldercare filed for bankruptcy protection in July 1993, and was dismissed from bankruptcy on October 12, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. The Trust's management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to the Trust as could have been obtained from unrelated third parties.
As more fully described in ITEM 2. "PROPERTIES - Real Estate," the Trust is engaged with NIRT in the Sacramento Nine and Indcon, L.P. partnerships.
In September 1990, the Trust's Board of Trustees authorized the purchase of up to $2.0 million of the common shares of ART through negotiated or open market transactions. The Trust's advisor also serves as advisor to ART and at March 17, 1995 ART owned approximately 35% of the Trust's outstanding shares of beneficial interest. At December 31, 1994, the Trust owned 204,522 shares of ART common stock which the Trust had purchased in open market transactions in 1990 and 1991 at a total cost to the Trust of $1.6 million. At December 31, 1991, the market value of such shares of ART common stock had declined to $1.1 million. The Trust determined that such decline represented an other than temporary decline in the market value of the ART common stock and accordingly, recognized a loss of $521,000. At December 31, 1994, the market value of the ART shares was $2.7 million. See ITEM 2. "PROPERTIES -Equity Investments in Real Estate Entities."
In December 1990, the Trust's Board of Trustees authorized the purchase of up to $1.0 million of the shares of beneficial interest of NIRT and up to $1.0 million of the shares of TCI common stock through negotiated or open market transactions. The Trustees of the Trust serve as directors of TCI. The officers of the Trust also serve as officers of TCI. BCM, the Trust's advisor, also serves as advisor to TCI. Until March 31, 1994, BCM served as advisor to NIRT. At December 31, 1994, the Trust owned 76,893 shares of beneficial interest of NIRT at a total cost of $415,000 and 53,000 shares of TCI common stock at a total cost of $235,000 all of which the Trust had purchased in open market transactions in 1990 and 1991. At December 31, 1994, the market value of the NIRT shares was $894,000 and the market value of the TCI common stock was $788,000. See ITEM 2. "PROPERTIES - Equity Investments in Real Estate Entities."
In 1994, the Trust paid BCM and its affiliates $1.3 million in advisory fees, $1.6 million in real estate and mortgage brokerage commissions and $570,000 in property and construction management fees and leasing commissions (net of property management fees paid to subcontractors, other than Carmel Realty). In addition, also as provided in the Advisory Agreement, BCM received cost reimbursements from the Trust of $524,000 in 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions
The Trust's Declaration of Trust provides that:
"The Trustees shall not...purchase, sell or lease any Real Properties or Mortgages to or from...the Advisor or any of [its] Affiliates," and that [t]he Trustees shall not...make any loan to...the Advisor or any of [its] Affiliates."
The Declaration of Trust further provides that:
"The Trust shall not purchase or lease, directly or indirectly, any Real Property or purchase any Mortgage from the Advisor or any affiliated Person, or any partnership in which any of the foregoing may also be a general partner, and the Trust will not sell or lease, directly or indirectly, any of its Real Property or sell any Mortgage to any of the foregoing Persons." The Declaration of Trust further provides that "the Trust shall not directly or indirectly, engage in any transaction with any Trustee, officer or employee of the Trust or any director, officer or employee of the Advisor...or of any company or other organization of which any of the foregoing is an Affiliate, except for...[among other things] transactions with...the Advisor or Affiliates thereof involving loans, real estate brokerage services, real property management services, the servicing of Mortgages, the leasing of real or personal property, or other services, provided such transactions are on terms not less favorable to the Trust than the terms on which nonaffiliated parties are then making similar loans or performing similar services for comparable entities in the same area and are not entered into on an exclusive basis."
The Declaration of Trust further provides that:
"The Trustees shall not...invest in any equity Security, including the shares of other REITs for a period in excess of 18 months, except for shares of a qualified REIT subsidiary, as defined in Section 856(i) of the Internal Revenue Code, and regular or residual interests in REMICs...[or] acquire Securities in any company holding investments or engaging in activities prohibited by this Section..."
The Declaration of Trust defines "Affiliate" as follows:
"As to any Person, any other Person who owns beneficially, directly or indirectly, 1% or more of the outstanding capital stock, shares, or equity interests of such Person or of any other Person which controls, is controlled by, or is under common control with, such Person or is an officer, retired officer, director, employee, partner, or trustee (excluding independent trustees not otherwise affiliated with the entity) of such Person or of any other Person which controls, is controlled by, or is under common control with, such Person."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
From 1990 until January 1995, all related party transactions that the Trust entered into were required to be reviewed by the Related Party Transaction Committee of the Trust's Board of Trustees to determine whether such transactions were (i) fair to the Trust and (ii) were permitted by the Trust's governing documents. Each of the members of the Related Party Transaction Committee was a Trustee who was not an officer, director or employee of BCM, the Trust's advisor, and was not an officer or employee of the Trust. The Related Party Transaction Committee was terminated by the Trust's Board of Trustees on January 11, 1995.
Pursuant to the terms of the Modification of Stipulation of Settlement of the Olive Litigation, which became effective on January 11, 1995, any related party transaction which the Trust may enter into prior to April 27, 1999, will require the unanimous approval of the Trust's Board of Trustees. In addition, related party transactions may only be entered into in exceptional circumstances and after a determination by the Trust's Board of Trustees that the transaction is in the best interests of the Trust and that no other opportunity exists that is as good as the opportunity presented by such transaction.
___________________________________
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Operations - Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (Continued)
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this report:
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (Continued)
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBITS TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1994