<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[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
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(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
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(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
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(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 4,222,905
- ------------------------------ --------------------------------
(Class) (Outstanding at April 30, 1996)
1
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This Form 10-Q/A amends the Registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 1996 as follows:
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - pages 4, 7 and 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - pages 14 and 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - EXHIBIT 27.0 FINANCIAL DATA
SCHEDULE - page 21
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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>
Revenues
Rents........................................ $ 10,707 $ 8,361
Interest..................................... 251 200
------------ ------------
10,958 8,561
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) from operations ........................ (47) (751)
Equity in income of partnerships............... 395 107
Gain on sale of real estate.................... 378 -
------------ -------------
Income (loss) before extraordinary gain........ 726 (644)
Extraordinary gain............................. 697 -
------------ ------------
Net income (loss).............................. $ 1,423 $ (644)
============ ============
Earnings per share
Income (loss) before extraordinary gain........ $ .17 $ (.15)
Extraordinary gain............................. .16 -
----------- -----------
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
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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...................... (378) -
Extraordinary gain............................... (697) -
Depreciation and amortization.................... 1,134 922
Provision for loss............................... - 541
Equity in (income) of partnerships............... (395) (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> 5
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").
Certain balances for 1995 have been reclassified to conform to the 1996
presentation. 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> 6
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. 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 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
14
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations Continued
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.
The Trust's equity in earnings of partnerships was $395,000 for the three
months ended March 31, 1996 as compared to $107,000 for the three months ended
March 31, 1995. Included in equity earnings of partnerships for the three
months ended March 31, 1996 is a $370,000 gain on sale of real estate, the
Trust's equity share of the gain recognized by Indcon, L.P. ("Indcon"), a joint
venture partnership, on the sale of 25 of its industrial warehouses. Excluding
such gain, the Trust's equity in earnings of partnerships would have been
income of $25,000 for the three months ended March 31, 1996. This decrease in
equity in earnings of partnerships is primarily due to the sale of 25 warehouse
facilities owned by Indcon in the first quarter of 1996. In addition, interest
expense for Sacramento Nine ("SAC 9"), also a joint venture partnership,
increased as a result of new mortgage financing secured on a previously
unencumbered office building. See NOTE 2. "INVESTMENTS IN PARTNERSHIPS."
15
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations Continued
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."
For the three months ended March 31, 1996, the Trust recognized an
extraordinary gain of $697,000, its equity share of an insurance settlement
from a fire loss on one of Indcon's industrial warehouses. See NOTE 2.
"INVESTMENTS IN PARTNERSHIPS."
15A
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<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
0
0
<COMMON> 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> (47)
<INCOME-TAX> 0
<INCOME-CONTINUING> (47)
<DISCONTINUED> 0
<EXTRAORDINARY> 697
<CHANGES> 0
<NET-INCOME> 1,423
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
