<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 MARCH 31, 1996
--------------
Commission File Number 0-10503
-------
CONTINENTAL MORTGAGE AND EQUITY TRUST
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
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)
(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
--- ---
<TABLE>
<S> <C>
Shares of Beneficial Interest,
no par value 4,222,905
- ------------------------------ --------------------------------
(Class) (Outstanding at April 30, 1996)
</TABLE>
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>
March 31, December 31,
1996 1995
-------------- --------------
(dollars in thousands)
Assets
------
<S> <C> <C>
Notes and interest receivable
Performing . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,499 $ 4,240
Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . 2,343 2,299
-------------- --------------
8,842 6,539
Less - allowance for estimated losses . . . . . . . . . . . . . . (1,188) (1,188)
-------------- --------------
7,654 5,351
Foreclosed real estate held for sale, net of
accumulated depreciation ($738 in 1996 and
1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,528 11,553
Real estate under contract for sale, net of
accumulated depreciation ($602 in 1995) . . . . . . . . . . . . - 1,268
Less - allowance for estimated losses . . . . . . . . . . . . . . (5,117) (5,117)
-------------- --------------
6,411 7,704
Real estate held for investment, net of accumulated
depreciation ($17,521 in 1996 and $16,395 in 1995) . . . . . . 181,550 174,713
Investment in marketable equity securities, at
market (including $4,961 in 1996 and $3,812 in
1995 of affiliates) . . . . . . . . . . . . . . . . . . . . . . 5,756 4,753
Investments in partnerships . . . . . . . . . . . . . . . . . . . 3,823 12,970
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . 11,670 6,386
Other assets (including $338 in 1996 and $469 in
1995 from affiliates) . . . . . . . . . . . . . . . . . . . . . 7,772 6,691
-------------- --------------
$ 224,636 $ 218,568
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 3
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes and interest payable . . . . . . . . . . . . . . . . . . . $ 141,717 $ 135,590
Other liabilities (including $245 in 1996 and $923
in 1995 to affiliates) . . . . . . . . . . . . . . . . . . . . 6,362 6,993
-------------- --------------
148,079 142,583
Commitments and contingencies
Shareholders' equity
Shares of Beneficial Interest, no par value;
authorized shares, unlimited; issued and out-
standing, 4,241,859 1996 and 4,377,141
shares in 1995 . . . . . . . . . . . . . . . . . . . . . . . . 8,495 8,766
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 259,032 260,060
Accumulated distributions in excess of accumulated
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . (195,002) (195,870)
Net unrealized gains on marketable equity securities . . . . . . 4,032 3,029
-------------- --------------
76,557 75,985
-------------- --------------
$ 224,636 $ 218,568
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------
1996 1995
-------------- --------------
(dollars in thousands,
except per share)
<S> <C> <C>
Revenue
Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,707 $ 8,361
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 200
Equity in income of partnerships . . . . . . . . . . . . . . . 25 107
-------------- --------------
10,983 8,668
Expenses
Property operations . . . . . . . . . . . . . . . . . . . . . . 6,210 4,985
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,927 2,106
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 1,137 963
Provision for losses . . . . . . . . . . . . . . . . . . . . . - 541
Advisory fee to affiliate . . . . . . . . . . . . . . . . . . . 382 352
General and administrative . . . . . . . . . . . . . . . . . . 349 365
-------------- --------------
11,005 9,312
-------------- --------------
(Loss) before gain on sale of real estate . . . . . . . . . . . . (22) (644)
Gain on sale of real estate . . . . . . . . . . . . . . . . . . . 1,445 -
-------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 1,423 $ (644)
============== ==============
Earnings per share
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ .33 $ (.15)
============== ==============
Weighted average shares of beneficial interest
used in computing earnings per share . . . . . . . . . . . . . 4,332,699 4,377,189
============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Shares of Distributions
Beneficial Interest in Excess of
---------------------------------- Paid-in Accumulated
Shares Amount Capital Earnings
--------- ------ ------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance, January 1,
1996............... 4,377,141 $8,766 $260,060 $(195,870)
Repurchase of shares
of beneficial
interest acquired.. (135,282) (271) (1,028) -
Distributions ($.13
per share)......... - - - (555)
Unrealized gains on
marketable equity
securities......... -
Net income................ - - - 1,423
--------- ------ -------- ---------
Balance, March 31,
1996............... 4,241,859 $8,495 $259,032 $(195,002)
========= ====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gains on
Marketable
Equity Shareholders'
Securities Equity
---------- ------
(dollars in thousands)
<S> <C> <C>
Balance, January 1,
1996......................... $3,029 $75,985
Repurchase of shares
of beneficial
interest acquired............ - (1,299)
Distributions ($.13
per share)................... - (555)
Unrealized gains on
marketable equity
securities.................. 1,003 1,003
Net income......................... - 1,423
------ -------
Balance, March 31,
1996........................ $4,032 $76,557
====== =======
</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
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------
1996 1995
-------- -------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected . . . . . . . . . . . . . . . . . . . . . . . . . $10,589 $ 8,321
Interest collected . . . . . . . . . . . . . . . . . . . . . . . 177 108
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . (2,666) (1,885)
Payments for property operations . . . . . . . . . . . . . . . . (6,254) (5,187)
General and administrative expenses paid . . . . . . . . . . . . (613) (321)
Advisory fee paid to affiliate . . . . . . . . . . . . . . . . . (382) (352)
Distributions from partnerships' operating cash
flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 224
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (185)
------- -------
Net cash provided by operating activities . . . . . . . . . . 1,421 723
Cash Flows from Investing Activities
Acquisitions of real estate . . . . . . . . . . . . . . . . . . . (7,529) (3,329)
Funding of capital improvement escrow . . . . . . . . . . . . . . (1,500) (252)
Real estate improvements . . . . . . . . . . . . . . . . . . . . (268) (329)
Proceeds from sale of real estate . . . . . . . . . . . . . . . . 889 33
Funding of note receivable . . . . . . . . . . . . . . . . . . . (1,500) -
Collections on notes receivable . . . . . . . . . . . . . . . . . 22 20
Distributions from partnership's investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . 9,669 -
------- ------
Net cash (used in) investing activities . . . . . . . . . . . (217) (3,857)
Cash Flows from Financing Activities
Distributions to shareholders . . . . . . . . . . . . . . . . . . (555) (437)
Repurchase of shares of beneficial interest . . . . . . . . . . . (1,299) -
Proceeds from notes payable . . . . . . . . . . . . . . . . . . . 6,300 -
Payments on notes payable and margin borrowings . . . . . . . . . (366) (861)
------ ------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . . . 4,080 (1,298)
------ ------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,284 (4,432)
Cash and cash equivalents, beginning of period . . . . . . . . . . 6,386 7,478
------ -------
Cash and cash equivalents, end of period . . . . . . . . . . . . . $11,670 $ 3,046
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 7
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1996 1995
------ ------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,423 $ (644)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Gain on sale of real estate . . . . . . . . . . . . . . . . . . . (1,445) -
Depreciation and amortization . . . . . . . . . . . . . . . . . . 1,134 922
Provision for loss . . . . . . . . . . . . . . . . . . . . . . . - 541
Equity in (income) of partnerships . . . . . . . . . . . . . . . (25) (107)
(Increase) in interest receivable . . . . . . . . . . . . . . . . (71) (75)
(Increase) decrease in other assets . . . . . . . . . . . . . . . 84 (254)
(Decrease) in other liabilities . . . . . . . . . . . . . . . . . (443) (13)
Increase in interest payable . . . . . . . . . . . . . . . . . . 194 129
Distributions from partnerships' operating cash
flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 224
------- -------
Net cash provided by operating activities . . . . . . . . . . . . $ 1,421 $ 723
======= =======
Noncash investing and financing activities
Notes payable from acquisition of real estate . . . . . . . . . . $ - $13,803
Mortgage note receivable from real estate sale . . . . . . . . . 750 -
Unrealized gain on marketable equity securities . . . . . . . . . 1,003 61
Carrying value of real estate acquired through
insubstance foreclosure . . . . . . . . . . . . . . . . . . . - 891
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
<PAGE> 8
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 three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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, 1995 ("1995 Form 10-K").
Shares and per share data have been restated for the three for two forward
share split effected February 15, 1996.
NOTE 2. INVESTMENTS IN PARTNERSHIPS
The Trust's investments in partnerships accounted for using the equity method
consisted of the following at March 31, 1996:
<TABLE>
<S> <C>
Sacramento Nine............................. $ (50)
Indcon, L.P. ............................... 3,873
------
$3,823
======
</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.
In February and March 1996, Indcon completed the sale of 25 of its industrial
warehouses for a total of $36.2 million in cash. Indcon received net cash of
$14.2 million, of which the Trust's equity share was $8.5 million, after the
payoff of existing mortgage debt with a principal balance of $23.4 million.
Indcon recognized a gain of $617,000 on the sale, of which the Trust's equity
share was $370,000. Indcon paid a real estate sales commission of $585,000 to
Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital
Management, Inc. ("BCM"), the Trust's advisor, based upon the $36.2 million
sales price of the properties.
In March 1996, Indcon reached a settlement with an insurance company on the
fire loss of one of its industrial warehouses. Indcon will receive a total of
$2.2 million, of which $1.9 million had been received as of
8
<PAGE> 9
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2. INVESTMENTS IN PARTNERSHIPS (Continued)
March 31, 1996. The remaining $308,000 was received in May 1996. Indcon does
not intend to rebuild the destroyed warehouse and accordingly has recognized a
gain of $1.2 million, of which the Trust's equity share was $697,000.
Set forth below is summarized results of operations for the partnerships the
Trust accounts for using the equity method for the three months ended March 31,
1996:
<TABLE>
<S> <C>
Rents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,353
Depreciation . . . . . . . . . . . . . . . . . . . . . . (119)
Property operations . . . . . . . . . . . . . . . . . . . (436)
Interest expense . . . . . . . . . . . . . . . . . . . . (651)
-------------
Income before gain on sale of real
estate . . . . . . . . . . . . . . . . . . . . . . . . . 147
Gain on sale of real estate . . . . . . . . . . . . . . . 1,778
-------------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 1,925
=============
</TABLE>
NOTE 3. MORTGAGE NOTES RECEIVABLE
In February 1996, the Trust funded a $1.5 million second lien mortgage secured
by the Signature Athletic Club Building in Dallas, Texas. The note bears
interest at 12% per annum and requires monthly interest only payments to the
extent of available cash flow. Any accrued but unpaid interest is added to the
principal balance of the note annually. In addition, the note requires
quarterly principal payments equal to the excess property cash flow for the
quarter. The note matures in October 1998 with an option to extend the note to
December 2000. The Trust has also guaranteed the underlying $3.0 million first
mortgage secured by the property. The Trust has an option to purchase a 50%
interest in the partnership which owns the Signature Athletic Club Building for
$100 at any time. The option expires in December 2005.
NOTE 4. REAL ESTATE
In February 1996, the Trust sold the Rivertree Apartments in Hurst, Texas for
$1.8 million. In conjunction with the sale, the Trust provided $750,000 of
purchase money financing in the form of a wraparound mortgage note. The Trust
received net cash of $959,000 after the payment of various closing costs
associated with the sale. The Trust paid a real estate sales commission of
$70,000 to Carmel Realty based on the $1.8 million sales price of the property.
The Trust recognized a gain of $378,000 on the sale.
In March 1996, the Trust purchased the Hampton Court Office Building, a 104,001
square foot office building in Dallas, Texas, for $7.7 million. The Trust paid
$1.4 million in cash and obtained new mortgage financing of $6.3 million. The
first mortgage bears interest at 8.0% per annum,
9
<PAGE> 10
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4. REAL ESTATE (Continued)
requires monthly payments of principal and interest of $42,000 and matures in
March 2001. In conjunction with the financing, the Trust established various
escrow accounts in the amount of $1.5 million. The Trust paid a real estate
brokerage commission of $205,000 to Carmel Realty and an acquisition fee of
$77,000 to BCM based on the $7.7 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. Accordingly, as of December 31, 1994, the Trust wrote down the
carrying value of the property by $1.2 million, which is included in the 1994
provision for losses, to the amount of the nonrecourse mortgage. In February
1996, the Trust and the lender entered into a forbearance agreement that
provides, among other things, that for a period of 90 days, the Trust make
monthly payments of the greater of regular scheduled principal and interest or
cash flow from the property. The deed to the property has been placed in
escrow during the term of the forbearance agreement. The Trust anticipates
that the property will be returned to the lender at the expiration of the
agreement. The Trust does not anticipate incurring a loss as the carrying
value of the property has been written down to the amount of the nonrecourse
mortgage debt, which approximates fair value of the property at March 31, 1996.
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,
results of operations or liquidity.
NOTE 7. SUBSEQUENT EVENTS
In April 1996, the Trust purchased the Amoco Building, a 378,244 square foot
office building in New Orleans, Louisiana, for $5.9 million in cash. The Trust
paid a real estate brokerage commission of $188,000 to Carmel Realty and an
acquisition fee of $59,000 to BCM based on the $5.9 million purchase price of
the property.
Also in April 1996, the Trust purchased the Central Storage Warehouse, a
216,035 square foot warehouse in Dallas, Texas, for $2.2 million in cash. The
Trust paid a real estate brokerage commission of $86,000 to Carmel Realty and
an acquisition fee of $22,000 to BCM based on the $2.2 million purchase price
of the property.
10
<PAGE> 11
CONTINENTAL MORTGAGE AND EQUITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7. SUBSEQUENT EVENTS (Continued)
In April 1996, the Trust refinanced the mortgage debt secured by the Edgewood
Apartments in Lansing, Illinois in the amount of $8.1 million. The Trust
received net cash of $1.3 million after the payoff of $6.7 million in existing
mortgage debt, including a $60,000 prepayment penalty. The remainder of the
refinancing proceeds were used to pay various closing costs associated with the
refinancing. The new mortgage bears interest at the rate of 8.65% per annum,
requires monthly payments of principal and interest of $66,000 and matures in
May 2006. The Trust paid BCM a mortgage brokerage and equity refinancing fee
of $81,000 based upon the new $8.1 million mortgage.
Also in April 1996, the Trust refinanced the mortgage debt secured by the In
the Pines Apartments in Gainesville, Florida in the amount of $6.0 million.
The Trust received net cash of $415,000 after the payoff of $5.3 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
pay various closing costs associated with the refinancing. The new mortgage
bears interest at the rate of 8.65% per annum, requires monthly payments of
principal and interest of $49,000 and matures in May 2006. The Trust paid BCM
a mortgage brokerage and equity refinancing fee of $60,000 based upon the new
$6.0 million mortgage.
In April 1996, Indcon completed the sale of two additional of its industrial
warehouses for $1.8 million in cash, of which the Trust's equity share was $1.1
million. Indcon paid a real estate sales commission of $16,000 to Carmel
Realty based upon the $1.8 million sales price of the properties.
----------------------
ITEM 2. 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 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 $11.7 million at March 31, 1996, compared
with $6.4 million at December 31, 1995. The principal reasons for the increase
in cash are discussed in the paragraphs below.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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 net cash provided by
operating activities 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 expenses applicable to rental income) increased from $3.1 million in the
first quarter of 1995 to $4.3 million in the first quarter of 1996. Of this
net increase, $600,000 is the result of the Trust acquiring six additional
income producing properties subsequent to March 31, 1995 and $150,000 is due to
the acquisition of two income producing properties in March 1995. The
remainder of the increase is due to increased rental and occupancy rates and
lower operating expenses at the Trust's apartment complexes. The Trust's
management believes that the Trust's cash flow from property operations will
continue to increase as the Trust continues to benefit from the properties
acquired in the last nine months of 1995 and first three months of 1996.
In February 1996, the Trust funded a $1.5 million second lien mortgage secured
by the Signature Athletic Club Building in Dallas, Texas.
In February 1996, the Trust sold the Rivertree Apartments in Hurst, Texas for
$1.8 million. In conjunction with the sale, the Trust provided $750,000 of
purchase money financing in the form of a wraparound mortgage note. The Trust
received net cash of $959,000 after the payment of various closing costs
associated with the sale.
In February and March 1996, Indcon completed the sale of 25 of its industrial
warehouses for a total of $36.2 million in cash. Indcon received net cash of
$14.2 million, of which the Trust's equity share was $8.5 million, after the
payoff of existing mortgage debt with a principal balance of $23.4 million.
In March 1996, Indcon reached a settlement with an insurance company on the
fire loss of one of its industrial warehouses. Indcon will receive a total of
$2.2 million, of which $1.9 million had been received as of March 31, 1996.
The remaining $308,000 was received in May 1996.
In March 1996, the Trust purchased the Hampton Court Office Building, a 104,001
square foot office building in Dallas, Texas, for $7.7 million. The Trust paid
$1.4 million in cash and obtained new mortgage financing of $6.3 million. In
conjunction with the financing, the Trust established various escrow accounts
in the amount of $1.5 million.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In April 1996, the Trust purchased the Amoco Building, a 378,244 square foot
office building in New Orleans, Louisiana, for $5.9 million in cash.
In April 1996, the Trust purchased the Central Storage Warehouse, a 216,035
square foot warehouse in Dallas, Texas, for $2.2 million in cash.
In April 1996, the Trust refinanced the mortgage debt secured by the Edgewood
Apartments in Lansing, Illinois in the amount of $8.1 million. The Trust
received net cash of $1.3 million after the payoff of $6.7 million in existing
mortgage debt, including a $60,000 prepayment penalty. The remainder of the
refinancing proceeds were used to pay various closing costs associated with the
refinancing.
Also in April 1996, the Trust refinanced the mortgage debt secured by the In
the Pines Apartments in Gainesville, Florida in the amount of $6.0 million.
The Trust received net cash of $415,000 after the payoff of $5.3 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
pay various closing costs associated with the refinancing.
In April 1996, Indcon completed the sale of two additional of its industrial
warehouses for $1.8 million in cash, of which the Trust's equity share was $1.1
million.
The Trust's Board of Trustees has authorized the Trust to repurchase a total of
1,465,000 of its shares of beneficial interest, of which 153,281 shares remain
to be purchased as of March 31, 1996. Through March 31, 1996, the Trust had
repurchased 1,311,719 of its shares at a total cost to the Trust of $6.3
million, of which 133,994 shares were purchased in the first quarter of 1996 at
a total cost of $1.3 million.
On March 1, 1996, the Trust's Board of Trustees announced an increase in the
Trust's regular quarterly distribution from $.10 per share to $.13 per share.
The distribution was paid on March 31, 1996, totaling $540,000, to shareholders
of record on March 15, 1996.
On a quarterly basis, the Trust's management reviews the carrying value of the
Trust's mortgage notes receivable and properties held for sale and
periodically, but no less than annually, its properties held for investment.
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 the initial instance when estimated net
realizable value of a mortgage note receivable or a property held for sale is
less than the carrying amount at the time of evaluation, a reserve is
established and a corresponding provision for loss is recorded by a charge
against earnings. A subsequent revision to estimated net realizable value
either increases or decreases such reserve with a corresponding charge against
or credit
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
to earnings. In the case of properties held for investment the carrying value
of the property is written down and a provision for loss is recorded. The
estimate of net realizable value of the Trust's 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 quarter ended March 31, 1996, the Trust had net income of $1.4 million,
compared to a net loss of $644,000 for the quarter ended March 31, 1995. The
primary factors contributing to the Trust's net income are discussed in the
following paragraphs.
Rents increased from $8.4 million for the three months ended March 31, 1995 to
$10.7 million for the three months ended March 31, 1996. Of this increase,
$1.3 million is attributable to the acquisition of four apartment complexes and
two commercial properties subsequent to March 31, 1995 and an additional
$342,000 is attributable to the acquisition of two commercial properties in
March 1995. The remainder of the increase is due to increased rental and
occupancy rates at the Trust's apartment complexes.
Interest income was $200,000 for the three months ended March 31, 1995 compared
to $251,000 for the three months ended March 31, 1996. This increase is due to
the funding of a $1.5 million second lien mortgage in February 1996 and a
$750,000 wraparound mortgage note issued in February 1996 in conjunction with
the sale of Rivertree Apartments. Interest income is expected to increase for
the remainder of 1996, as a result of the $1.5 million second lien mortgage
funded by the Trust in February 1996.
The Trust's equity in income of partnerships was $25,000 for the three months
ended March 31, 1996 compared to $107,000 for the three months ended March 31,
1995. This decrease in equity income is primarily due to the sale of 25
warehouse facilities owned by Indcon, L.P. ("Indcon"), a joint venture
partnership in which the Trust owns a 60% interest, in the first quarter of
1996. In addition, interest expense for Sacramento Nine ("Sac 9"), a joint
venture partnership in which the Trust owns a 30% interest, increased as a
result of new mortgage financing secured on a previously unencumbered office
building owned by Sac 9. See NOTE 2. "INVESTMENTS IN PARTNERSHIPS." Equity
income is expected to be minimal for the remainder of 1996.
Property operating expenses increased from $5.0 million for the three months
ended March 31, 1995 to $6.2 million for the three months ended March 31, 1996.
Of this increase, $682,000 is due to the acquisition of four apartment
complexes and two commercial properties subsequent to March 31, 1995 and an
additional $183,000 is due to the acquisition of
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations Continued
two commercial properties in March 1995. The remainder of the increase is
primarily due to increased repairs and maintenance and personnel expenses in an
effort to maintain the Trust's increased rental and occupancy rates.
Interest expense increased from $2.1 million for the three months ended March
31, 1995 to $2.9 million for the three months ended March 31, 1996. Of this
increase, $660,000 is due to interest expense recorded on mortgages secured by
six properties acquired subsequent to March 31, 1995 and two properties
acquired in March 1995. An additional $156,000 is due to interest expense
recorded on borrowings subsequent to March 31, 1995, secured by a mortgage on a
previously unencumbered apartment complex and the refinancing of an existing
mortgage. Interest expense is expected to increase in the remainder of 1996,
as a result of the Trust's acquisition of a commercial property in February
1996 incumbered by debt.
Depreciation expense increased from $963,000 for the three months ended March
31, 1995 to $1.1 million for the same period in 1996. This increase is due to
the acquisition of four apartment complexes and two commercial properties
subsequent to March 31, 1995. Depreciation is also expected to increase in the
remainder of 1996, as a result of the Trust's acquisition of a commercial
property in February 1996 and two commercial properties in April 1996.
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. No provision was required in
1996.
Advisory fee to affiliate increased from $352,000 for the three months ended
March 31, 1995 to $383,000 for the three months ended March 31, 1996. This
increase is due to an increase in the Trust's gross assets, the basis for the
advisory fee, as a result of the acquisition of six properties subsequent to
March 31, 1995. The advisory fee is expected to continue to increase as the
Trust makes additional property acquisitions.
General and administrative expenses decreased slightly from $365,000 for the
three months ended March 31, 1995 to $349,000 for the three months ended March
31, 1996. This decrease is primarily attributable to a decrease in legal fees.
For the three months ended March 31,1996, the Trust recognized a gain on the
sale of real estate of $378,000 on the sale of Rivertree Apartments in February
1996. See NOTE 4. "REAL ESTATE." In addition, the Trust recognized a gain of
$370,000, its 60% equity share of the gain recognized by Indcon on the sale of
25 industrial warehouses and a gain of $697,000, also its equity share of an
insurance settlement from a fire loss on another industrial
warehouse owned by Indcon. See NOTE 2. "INVESTMENTS IN PARTNERSHIPS."
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Tax Matters
As more fully discussed in the Trust's 1995 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.
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
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued)
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. The Trust adopted SFAS No. 121 effective
January 1, 1996.
The effect of adopting SFAS No. 121 was the discontinuance of depreciation on
the Trust's properties held for sale of $26,000 in the three months ended March
31, 1996, and a corresponding increase in its reported net income.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
17
<PAGE> 18
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
18
<PAGE> 19
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
Date: May 14, 1996 By: /s/ Randall M. Paulson
------------------------- -----------------------------
Randall M. Paulson
President
Date: May 14, 1996 By: /s/ Thomas A. Holland
------------------------- -----------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<PAGE> 20
CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ -------------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule. 21
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> MAR-31-1996
<CASH> 11,670
<SECURITIES> 5,756
<RECEIVABLES> 8,842
<ALLOWANCES> 6,305
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 211,337
<DEPRECIATION> 18,259
<TOTAL-ASSETS> 224,636
<CURRENT-LIABILITIES> 0
<BONDS> 141,717
<COMMON> 0
0
0
<OTHER-SE> 76,557
<TOTAL-LIABILITY-AND-EQUITY> 224,636
<SALES> 0
<TOTAL-REVENUES> 10,707
<CGS> 0
<TOTAL-COSTS> 6,210
<OTHER-EXPENSES> 1,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,927
<INCOME-PRETAX> 1,423
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,423
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
