<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1995
Commission File Number 0-10503
CONTINENTAL MORTGAGE AND EQUITY TRUST
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
California 94-2738844
-------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, TX 75231
----------------------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(214) 692-4700
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Shares of Beneficial Interest,
no par value 2,918,106
------------------------------ --------------------------------
(Class) (Outstanding at July 28, 1995)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of Continental Mortgage and Equity Trust (the "Trust"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
consolidated results of operations, consolidated financial position and
consolidated cash flows at the dates and for the periods indicated, have been
included.
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------- ------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Notes and interest receivable
Performing........................................ $ 4,317 $ 4,269
Nonperforming, nonaccruing........................ 4,603 6,946
-------------- --------------
8,920 11,215
Real estate held for sale, net of accumulated
depreciation ($1,601 in 1995 and $1,409 in 1994).. 25,407 24,658
Less - allowance for estimated losses............... (9,207) (9,223)
-------------- --------------
25,120 26,650
Real estate held for investment, net of accumulated
depreciation ($13,885 in 1995 and $12,050 in 1994) 144,312 124,706
Investment in marketable equity securities, at
market (including $3,493 in 1995 and $3,447 in
1994 of affiliates)............................... 4,396 4,341
Investments in partnerships......................... 13,472 13,805
Cash and cash equivalents........................... 6,567 7,478
Other assets (including $394 in 1995 and $604 in
1994 from affiliates)............................. 6,848 5,859
-------------- --------------
$ 200,715 $ 182,839
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes and interest payable.......................... $ 118,059 $ 98,252
Other liabilities (including $278 in 1995 and $437
in 1994 to affiliates)............................ 5,435 5,820
-------------- --------------
123,494 104,072
Commitments and contingencies
Shareholders' equity
Shares of Beneficial Interest, no par value;
authorized shares, unlimited; issued and out-
standing, 2,918,109 shares in 1995 and 2,918,133
shares in 1994.................................... 8,766 8,766
Paid-in capital..................................... 260,060 260,060
Accumulated distributions in excess of accumulated
earnings.......................................... (194,277) (192,676)
Net unrealized gains on marketable equity securities 2,672 2,617
-------------- --------------
77,221 78,767
-------------- --------------
$ 200,715 $ 182,839
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 3
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- ---------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Revenue
Rents....................... $ 9,345 $ 6,383 $ 17,706 $ 12,261
Interest.................... 204 781 404 1,447
Equity in income (loss) of
partnerships................ 78 (364) 185 (387)
------------- ------------ ----------- -------------
9,627 6,800 18,295 13,321
Expenses
Property operations......... 5,575 4,009 10,560 7,673
Interest.................... 2,411 1,866 4,517 3,526
Depreciation................ 1,067 772 2,030 1,497
Provision for losses........ - - 541 200
Advisory fee to affiliate... 393 357 745 646
General and administrative.. 264 395 629 707
------------- ------------ ----------- -------------
9,710 7,399 19,022 14,249
------------- ------------ ----------- -------------
(Loss) before gain on sale
of real estate.............. (83) (599) (727) (928)
Gain on sale of real estate.. - 577 - 577
------------- ------------ ----------- -------------
Net (loss)................... $ (83) $ (22) $ (727) $ (351)
============= ============ =========== =============
Earnings per share
(Loss) before gain on
sale of real estate......... $ (.03) $ (.21) $ (.25) $ (.32)
Gain on sale of real estate. - .20 - .20
------------- ------------ ----------- -------------
Net (loss).................. $ (.03) $ (.01) $ (.25) $ (.12)
============= ============ =========== =============
Weighted average shares of
beneficial interest used in
computing earnings per share. 2,918,111 2,913,840 2,918,118 2,916,496
============ ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Unrealized
Shares of Distributions Gains on
Beneficial Interest in Excess of Marketable
--------------------- Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
--------- ---------- ---------- ------------- -------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................ 2,918,133 $ 8,766 $ 260,060 $ (192,676) $ 2,617 $ 78,767
Fractional shares of
beneficial interest
acquired............ (24) - - - - -
Distributions ($.30
per share).......... - - - (874) - (874)
Unrealized gains on
marketable equity
securities.......... - - - - 55 55
Net (loss).......... - - - (727) - (727)
--------- -------- ---------- ---------- -------- ---------
Balance, June 30,
1995................ 2,918,109 $ 8,766 $ 260,060 $ (194,277) $ 2,672 $ 77,221
========= ======== ========== ========== ======== =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
---------------------------------
1995 1994
----------- ----------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected.................................. $ 17,733 $ 12,402
Interest collected............................... 232 1,398
Interest paid.................................... (4,123) (2,978)
Payments for property operations................. (10,601) (8,103)
General and administrative expenses paid......... (673) (605)
Advisory fee paid to affiliate................... (745) (646)
Distributions from partnerships' operating cash
flow......................................... 517 -
Other............................................ 183 184
-------------- --------------
Net cash provided by operating activities.... 2,523 1,652
Cash Flows from Investing Activities
Acquisition of real estate....................... (3,178) (5,438)
Funding of capital improvement escrows........... (1,252) -
Real estate improvements......................... (881) (342)
Proceeds from sale of real estate................ 33 2,066
Collections on notes receivable.................. 1,040 245
Distributions from a partnership's investing
activities................................... - 1,275
Contributions to partnerships.................... - (14)
-------------- --------------
Net cash (used in) investing activities...... (4,238) (2,208)
Cash Flows from Financing Activities
Distributions to shareholders.................... (874) (876)
Proceeds from notes payable and margin borrowings 4,219 5,272
Payments on notes payable........................ (2,541) (507)
Repurchase of shares of beneficial interest...... - (84)
-------------- --------------
Net cash provided by financing activities.... 804 3,805
-------------- --------------
Net increase (decrease) in cash and cash
equivalents...................................... (911) 3,249
Cash and cash equivalents, beginning of period.... 7,478 1,771
-------------- --------------
Cash and cash equivalents, end of period.......... $ 6,567 $ 5,020
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 6
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------------------
1995 1994
----------- -----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash provided
by operating activities
Net (loss)........................................ $ (727) $ (351)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Depreciation and amortization.................... 1,949 1,497
Provision for loss............................... 541 200
Gain on sale of real estate...................... - (577)
(Increase) decrease in interest receivable....... (94) 329
Decrease in other assets......................... 132 146
Increase (decrease) in other liabilities......... 82 (47)
Increase in interest payable..................... 307 68
Distributions from partnerships' operating cash
flow......................................... 517 -
Equity in (income) loss of partnerships.......... (184) 387
-------------- --------------
Net cash provided by operating activities.... $ 2,523 $ 1,652
============== ==============
Noncash investing and financing activities
Notes payable from acquisition of real estate.... $ 16,640 $ 9,205
Interest on wraparound mortgage loan paid
directly to underlying lienholder............ - 428
Unrealized gain on marketable equity securities.. 55 22
Note receivable from the sale of real estate..... - 365
Carrying value of real estate acquired through
insubstance foreclosure in satisfaction of a
note receivable with a carrying value of $891 891 -
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 7
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the six month period ended June 30, 1995 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. Dollar amounts in tables are in thousands. For
further information, refer to the Consolidated Financial Statements and Notes
thereto included in the Trust's Annual Report on Form 10-K for the year ended
December 31, 1994 ("1994 Form 10-K").
NOTE 2. INVESTMENTS IN PARTNERSHIPS
The Trust's investments in partnerships accounted for using the equity method
consisted of the following at June 30, 1995:
<TABLE>
<S> <C>
Sacramento Nine....................... $ 946
Indcon, L.P........................... 12,526
--------------
$ 13,472
==============
</TABLE>
The Trust and National Income Realty Trust ("NIRT") are partners in Sacramento
Nine, the Trust having a 30% interest in the partnership's earnings, losses and
distributions. 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, L.P. The partnership agreements require the consent of
both the Trust and NIRT for any material changes in the operations of the
partnerships' properties, including sales, refinancings and changes in property
management. The Trust, as a noncontrolling partner, accounts for its
investment in the partnerships using the equity method.
Set forth below is summarized results of operations for the partnerships the
Trust accounts for using the equity method for the six months ended June 30,
1995:
<TABLE>
<S> <C>
Rents................................... $ 3,939
Depreciation............................ (1,038)
Property operations..................... (1,064)
Interest expense........................ (1,354)
-------------
Net income.............................. $ 483
=============
</TABLE>
NOTE 3. MORTGAGE NOTES RECEIVABLE
At December 31, 1994, the $1.5 million first mortgage note receivable secured
by the Alderwood Apartments in Detroit, Michigan was in default. In April
1995, the borrower offered the Trust $1.0 million in cash in
7
<PAGE> 8
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3. MORTGAGE NOTES RECEIVABLE (Continued)
full satisfaction of the debt, which the Trust accepted. A provision for loss
of $541,000 was recognized in March 1995 to provide for the loss on the
discounted payoff of the mortgage note receivable. The $1.0 million discounted
payoff of the note receivable was received on May 9, 1995.
In March 1995, the Trust recorded the insubstance foreclosure of the collateral
property securing a mortgage note receivable with a principal balance of
$891,000. See NOTE 4. "REAL ESTATE."
NOTE 4. REAL ESTATE
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, Inc. ("Carmel Realty"), an
affiliate of Basic Capital Management, Inc. ("BCM"), the Trust's advisor, and
an acquisition fee of $110,000 to BCM based on the $11.0 million purchase price
of the property.
In March 1995, the Trust purchased the Kelly Warehouses, six industrial
warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for
$5.4 million. The Trust paid $444,000 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 financing bears interest at rates ranging from 6% to 8% per
annum, requires monthly payments of principal and interest of $3,000 and
matures in July 1999. In addition, the Trust funded a $252,000 capital
improvement escrow related to the $4.6 million mortgage. 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.
In March 1995, the Trust recorded the insubstance foreclosure of Driftwood
Apartments, a 138 unit apartment complex in Detroit, Michigan. Driftwood
Apartments had an estimated fair value (minus estimated costs of sale) at the
date of foreclosure, which exceeded the carrying value of the Trust's note
receivable. Foreclosure of the property was completed on May 2, 1995. The
foreclosure resulted in no loss to the Trust.
8
<PAGE> 9
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4. REAL ESTATE (Continued)
In May 1995, the Trust purchased the Will-O-Wick Apartments, a 152 unit
apartment complex in Pensacola, Florida, for $3.6 million. The Trust paid
$687,000, assumed an existing first mortgage of $2.8 million and the seller
provided additional financing of $79,000. The $2.8 million first mortgage
bears interest at 9.915% per annum, requires monthly payments of principal and
interest of $26,000 and matures in April 2001. The $79,000 seller financing
bears interest at 9.9% per annum and requires monthly payments of interest only
through maturity in May 1997 at which time the entire outstanding principal
balance and all accrued and unpaid interest is due. The Trust paid a real
estate brokerage commission of $127,000 to Carmel Realty and an acquisition fee
of $36,000 to BCM based on the $3.6 million purchase price of the property.
NOTE 5. NOTES PAYABLE
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 was included in the 1994 provision for losses, to the
amount of the nonrecourse mortgage.
In May 1995, the Trust obtained new mortgage financing secured by the Sunset
Lake Apartments in Waukegan, Illinois in the amount of $5.4 million. The Trust
received net cash of $2.2 million after the payoff of $1.9 million in existing
mortgage debt that was scheduled to mature in September 1995. The remainder of
the financing proceeds were used to fund a $1.0 million escrow for replacements
and repairs and to pay various closing costs associated with the financing.
The new $5.4 million mortgage bears interest at a variable rate of prime plus
1-1/2%, (10.5% at June 30, 1995), requires monthly payments of principal and
interest and matures in May 2000. The Trust paid a mortgage brokerage and
equity refinancing fee of $54,000 to BCM based upon the new first mortgage
financing of $5.4 million.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Trust is involved in various lawsuits arising in the ordinary course of
business. Management of the Trust is of the opinion that the outcome of these
lawsuits would have no material impact on the Trust's financial condition.
9
<PAGE> 10
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7. SUBSEQUENT EVENTS
In July 1995, the Trust purchased the McCallum Glen Apartments, a 275 unit
apartment complex in Dallas, Texas for $6.0 million. The Trust paid $1.8
million and obtained new mortgage financing of $4.2 million. The new first
mortgage bears interest at a variable rate, currently 8.6% per annum, requires
monthly payments of principal and interest and matures on August 1, 2002. The
Trust paid a real estate brokerage commission of $190,000 to Carmel Realty and
an acquisition fee of $60,000 to BCM based on the $6.0 million purchase price.
___________________________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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 first, wraparound 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 $6.6 million at June 30, 1995, compared
with $7.5 million at December 31, 1994. The principal reasons for the
reduction in cash are discussed in the paragraphs below.
The Trust's principal sources of cash have been and will continue to be
property operations, proceeds from property sales, collections of mortgage
notes receivable and borrowings. The Trust expects that funds from operations
and from anticipated external sources, such as property sales and refinancings,
will be sufficient to meet the Trust's various cash needs, including, but not
limited to, debt service obligations, shareholder distributions and property
maintenance and improvements.
The Trust's cash flow from property operations (rents collected less payments
for property operating expenses) increased from $4.3 million in the first six
months of 1994 to $7.1 million in the first six months of 1995. Of this net
increase, $2.1 million is the result of the Trust acquiring nine additional
income producing properties in the last six months of 1994 and first six months
of 1995. In addition, $531,000 of the increase is due to increases in cash
flow from one of the Trust's apartment complexes and two of the Trust's
commercial properties due to an increase in occupancy rates and a decrease in
operating expenses. The Trust's management believes that the Trust's cash flow
from property operations will continue to increase as the Trust benefits from
the properties acquired in the last six months of 1994 and first six months of
1995.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Liquidity and Capital Resources (Continued)
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.
In March 1995, the Trust purchased the Kelly Warehouses, six industrial
warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for
$5.4 million. The Trust paid $444,000 in cash, obtained new mortgage financing
of $4.6 million and the seller provided additional financing of $403,000. In
addition, the Trust funded a $252,000 capital improvement escrow related to the
$4.6 million mortgage.
In May 1995, the Trust received $1.0 million in cash from the discounted payoff
of the mortgage note receivable secured by the Alderwood Apartments in Detroit,
Michigan. See NOTE 3. "MORTGAGE NOTES RECEIVABLE."
In May 1995, the Trust purchased the Will-O-Wick Apartments, a 152 unit
apartment complex in Pensacola, Florida, for $3.6 million. The Trust paid
$687,000 in cash, assumed an existing first mortgage of $2.8 million and the
seller provided additional financing of $79,000.
In May 1995, the Trust obtained new mortgage financing secured by the Sunset
Lake Apartments in Waukegan, Illinois in the amount of $5.4 million. The Trust
received net cash of $2.2 million after the payoff of $1.9 million in existing
mortgage debt that was scheduled to mature in September 1995. The remainder of
the financing proceeds were used to fund a $1.0 million escrow for replacements
and repairs and to pay various closing costs associated with the financing.
In July 1995, the Trust purchased the McCallum Glen Apartments a 275 unit
apartment complex in Dallas, Texas for $6.0 million. The Trust paid $1.8
million in cash and obtained new mortgage financing of $4.2 million.
The Trust's Board of Trustees has authorized the Trust to repurchase a total of
976,667 of its shares of beneficial interest, of which 191,517 shares remain to
be purchased as of July 31, 1995. The Trust has not repurchased any of its
shares during 1995.
In the first six months of 1995, the Trust paid quarterly distributions of
$.30 per share or a total of $874,000.
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 such assets cannot exceed the lower of their
respective carrying amounts or estimated net realizable value. In an instance
where the estimated net realizable value is less than the carrying amount at
the time of evaluation, a provision for loss is
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Liquidity and Capital Resources (Continued)
recorded by a charge against earnings. The estimate of net realizable value
of mortgage notes receivable is based on management's review and evaluation of
the collateral property securing the mortgage note. 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 the surrounding area. See "Recent Accounting
Pronouncement," below.
Results of Operations
For the three and six months ended June 30, 1995, the Trust had a net loss of
$83,000 and $727,000, compared to a net loss of $22,000 and $351,000 for the
three and six months ended June 30, 1994. The primary factors contributing to
the Trust's increased net loss are discussed in the following paragraphs.
Net rental income (rents less property operating expenses) increased from $2.4
million and $4.6 million for the three and six months ended June 30, 1994 to
$3.8 million and $7.1 million for the three and six months ended June 30, 1995.
Of this increase, $1.1 million for the three months and $2.1 million for the
six months is due to the acquisition of six apartment complexes and three
commercial properties subsequent to June 30, 1994. In addition, an increase of
$218,000 for the six months is due to the acquisition of two apartment
complexes in June 1994 and one apartment complex in March 1994. An additional
increase of $531,000 for the six months is due to an increase in occupancy
rates and a decrease in operating expenses at one of the Trust's apartment
complexes and two of the Trust's commercial properties. These increases are
partially offset by a decrease in net rental income at two of the Trust's
apartment complexes and one of the Trust's commercial properties due to a
decrease in occupancy rates and an increase in operating expenses.
Interest income decreased from $781,000 and $1.4 million for the three and six
months ended June 30, 1994 to $204,000 and $404,000 for the three and six
months ended June 30, 1995. Of this decrease $390,000 for the three months and
$778,000 for the six months is attributable to a $14.0 million wraparound
mortgage note receivable which was paid in full in December 1994 and an
additional $188,000 for the three months and $274,000 for the six months is due
to the foreclosure of two properties during 1994 and one property during 1995
which secured three of the Trust's other mortgage notes receivable. Interest
income is expected to continue at approximately the second quarter's level for
the remainder of 1995, as the Trust is not considering new mortgage lending
except in connection with purchase money financing of sales of Trust
properties.
The Trust's equity in partnerships improved from a loss of $364,000 and
$387,000 for the three and six months months ended June 30, 1994 to income of
$78,000 and $185,000 for the three and six months ended June
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Results of Operations (Continued)
30, 1995. This improvement in the operations of the Trust's equity affiliates
is primarily due to higher occupancy and lower operating expenses at the 32
warehouse facilities owned by Indcon, L.P., a joint venture partnership in
which the Trust owns a 60% interest. See NOTE 2. "INVESTMENTS IN
PARTNERSHIPS."
Interest expense increased from $1.9 million and $3.5 million for the three and
six months ended June 30, 1994 to $2.4 million and $4.5 million for the three
and six months ended June 30, 1995. Of this increase, $559,000 for the three
months and $905,000 for the six months is due to interest expense incurred on
mortgages secured by properties acquired subsequent to June 30, 1994. An
additional $89,000 for the three months and $154,000 for the six months is due
to interest expense incurred on borrowings subsequent to June 30, 1994, all
secured by mortgages on previously unencumbered apartment complexes. An
additional increase of $261,000 for the six months is due to interest expense
incurred on mortgages secured by properties acquired in February and March of
1994 and interest expense incurred on borrowings in April, May and December of
1994. These increases are partially offset by a decrease of $214,000 for the
three months and $428,000 for the six months due to the payoff of the
underlying lien related to the payoff of a $14.0 million wraparound mortgage
note receivable in December 1994.
Depreciation increased from $772,000 and $1.5 million for the three and six
months ended June 30, 1994 to $1.1 million and $2.0 million for the three and
six months ended June 30, 1995. These increases are due to the acquisition of
six apartment complexes and three commercial properties subsequent to June 30,
1994.
A provision for losses of $541,000 was recognized in the three months ended
March 31, 1995 to provide for the loss on the discounted payoff of the mortgage
note receivable secured by Alderwood Apartments. See NOTE 3. "MORTGAGE NOTES
RECEIVABLE." A provision for losses of $200,000 was recorded for the three
months ended March 31, 1994 to provide for the loss on the sale of Oak Forest
Apartments, one of the Trust's foreclosed properties held for sale. No
provision for losses was recorded in the second quarter of either 1994 or 1995.
Advisory fee to affiliate increased from $357,000 and $646,000 for the three
and six months ended June 30, 1994 to $393,000 and $745,000 for the three and
six months ended June 30, 1995. These increases are due to an increase in the
Trust's gross assets, the basis for the advisory fee, as a result of the
acquisition of nine properties subsequent to June 30, 1994. The advisory fee
is expected to continue to increase as the Trust makes additional property
acquisitions.
General and administrative expenses decreased from $395,000 and $707,000 for
the three and six months ended June 30, 1994 to $264,000 and $629,000 for the
three and six months ended June 30, 1995. This decrease is primarily
attributable to decreases in legal and appraisal fees.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Results of Operations (Continued)
For the three and six months ended June 30, 1994, the Trust recognized a gain
on the sale of real estate of $577,000 related to the sale of an industrial
warehouse by Indcon, a joint venture partnership in which the Trust owns a 60%
interest. No such gain was recognized in the three and six months ended June
30, 1995.
Tax Matters
As more fully discussed in the Trust's 1994 Form 10-K, the Trust has elected
and in the opinion of the Trust's management, qualified to be taxed as a Real
Estate Investment Trust ("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 and 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.
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. To the extent that inflation
affects interest rates, the Trust's earnings from short-term investments and
the cost of new borrowings as well as its existing variable rate borrowings
will be affected.
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.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Recent Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified or held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not to be depreciated. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995.
The Trust's management has not fully evaluated the effects of adopting SFAS
No. 121, but expects that the Trust's policy with regard to the classification
of foreclosed revenue producing properties as assets held for sale will require
reevaluation.
The Trust's management estimates that if the Trust had adopted SFAS No. 121
effective January 1, 1995, without a change in its policy of classifying
foreclosed revenue producing assets as held for sale, its depreciation in the
three and six months ended June 30, 1995 would have been reduced by $89,000 and
$192,000, respectively, its net loss in each period would have been reduced by
a like amount and that a provision for loss for either impairment of its
properties held for investment or for a decline in estimated fair value less
cost to sell of its properties held for sale would not have been required in
either period.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------------------------------------------------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K as follows:
None
16
<PAGE> 17
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL MORTGAGE AND EQUITY TRUST
<TABLE>
<S> <C>
Date: August , 1995 By: /s/ Oscar W. Cashwell
------------------------- -----------------------------------
Oscar W. Cashwell
President
Date: August , 1995 By: /s/ Thomas A. Holland
------------------------- -----------------------------------
Thomas A. Holland
Senior Vice President and
Chief Accounting Officer
</TABLE>
17
<PAGE> 18
CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended June 30, 1995
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- --------------------------------------------------- ------
<S> <C>
27.0 Financial Data Schedule.
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> JUN-30-1995
<CASH> $6,567
<SECURITIES> 4,396
<RECEIVABLES> 8,920
<ALLOWANCES> 9,207
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 185,205
<DEPRECIATION> 15,486
<TOTAL-ASSETS> 200,715
<CURRENT-LIABILITIES> 0
<BONDS> 118,059
<COMMON> 0
0
0
<OTHER-SE> 77,221
<TOTAL-LIABILITY-AND-EQUITY> 200,715
<SALES> 0
<TOTAL-REVENUES> 17,706
<CGS> 0
<TOTAL-COSTS> 10,560
<OTHER-EXPENSES> 2,030
<LOSS-PROVISION> 541
<INTEREST-EXPENSE> 4,517
<INCOME-PRETAX> (727)
<INCOME-TAX> 0
<INCOME-CONTINUING> (727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (727)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
