<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 JUNE 30, 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 4,185,240
- ------------------------------ --------------------------------
(Class) (Outstanding at July 26, 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 June 30, 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 18 and 19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - EXHIBIT 27.0 FINANCIAL DATA
SCHEDULE - page 25
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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,
------------------------ ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Revenues
Rents....................... $ 11,063 $ 9,345 $ 21,770 $ 17,706
Interest.................... 302 204 553 404
--------- ---------- --------- ---------
11,365 9,549 22,323 18,110
Expenses
Property operations......... 6,693 5,575 12,903 10,560
Interest.................... 3,136 2,411 6,063 4,517
Depreciation................ 1,157 1,067 2,294 2,030
Provision for losses........ - - - 541
Advisory fee to affiliate... 469 393 851 745
General and administrative.. 590 264 939 629
--------- ---------- --------- ---------
12,045 9,710 23,050 19,022
--------- ---------- --------- ---------
(Loss) from operations....... (680) (161) (727 (912)
Equity in income (loss) of
partnerships.............. (219) 78 176 185
Gain on sale of real estate... 5,421 - 5,799 -
--------- ---------- --------- ---------
Income (loss) before extra-
ordinary gain (loss)........ 4,522 (83) 5,248 (727)
Extraordinary gain............ (34) - 663 -
--------- ---------- --------- ---------
Net income (loss)............. $ 4,488 $ (83) $ 5,911 $ (727)
========= ========== ========= =========
Earnings per share
Income (loss) before
extraordinary gain........ $ 1.07 $ (.02) $ 1.23 $ (.17)
Extraordinary gain.......... - - .16 -
--------- ---------- --------- ---------
Net income (loss)........... $ 1.07 $ (.02) $ 1.39 $ (.17)
========= ========== ========= =========
Weighted average shares of
beneficial interest used in
computing earnings per share 4,214,062 4,377,167 4,273,916 4,377,177
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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CONTINENTAL MORTGAGE AND EQUITY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------------
1996 1995
---------- ----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss).................................. $ 5,911 $ (727)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization.................... 2,294 1,949
Provision for loss............................... - 541
Gain on sale of real estate...................... (5,799) -
Extraordinary gain............................... (663) -
(Increase) in interest receivable................ (50) (94)
Decrease in other assets......................... 2,399 133
Increase (decrease) in other liabilities......... (543) 82
Increase in interest payable..................... 93 307
Distributions from partnerships' operating cash
flow........................................... 941 517
Equity in (income) of partnerships............. (176) (185)
---------- -------
Net cash provided by operating activities...... $ 4,407 $ 2,523
========== ==========
Noncash investing and financing activities
Notes payable from acquisition of real estate.... $ 3,200 $ 16,640
Interest on wraparound mortgage loan paid
directly to underlying lienholder.............. 12 -
Unrealized gain on marketable equity securities.. 1,173 55
Note receivable from the sale of real estate..... 750 -
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.
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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, 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 June 30, 1996:
<TABLE>
<S> <C>
Sacramento Nine....................... $ (34)
Indcon, L.P........................... 2,093
-------------
$2,059
</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 sold 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 received a
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations Continued
a $1.5 million second lien mortgage in February 1996 and a $750,000 wraparound
mortgage note accepted in February 1996 in conjunction with the sale of
Rivertree Apartments. Interest income for the remainder of 1996 is expected to
approximate that of the first six months of 1996.
Property operating expenses increased from $5.6 million and $10.6 million for
the three and six months ended June 30, 1995 to $6.7 million and $12.9 million
for the three and six months ended June 30, 1996. Increases of $1.3 million
and $1.7 million are due to the acquisition of four apartment complexes and
four commercial properties subsequent to June 30, 1995. The remainder of the
increase is primarily due to increased repair and maintenance and personnel
expenses in an effort to maintain the Trust's increased rental and occupancy
rates. These increases are partially offset by decreases of $261,000 and
$312,000 due to properties sold in 1996.
Interest expense increased from $2.4 million and $4.5 million for the three and
six months ended June 30, 1995 to $3.1 million and $6.1 million for the three
and six months ended June 30, 1996. Of this increase, $340,000 and $1.0
million for the three and six months, respectively, is due to interest expense
recorded on mortgages secured by nine properties, encumbered by debt, acquired
during 1996 and 1995. An additional $278,000 and $434,000 for the three and
six months, respectively, is due to interest expense recorded on borrowings
during 1996 and 1995, secured by mortgages on three previously unencumbered
apartment complexes and the refinancing of four existing mortgages. Interest
expense is expected to increase in the remainder of 1996, as a result of the
Trust's acquisition of other properties and refinancings during the remainder
of 1996.
Depreciation expense increased from $1.1 million and $2.0 million for the three
and six months ended June 30, 1995 to $1.1 million and $2.2 million for the
same period in 1996. This increase is due to the acquisition of five apartment
complexes and six commercial properties during 1996 and 1995. Depreciation is
expected to increase in the remainder of 1996, as a result of the Trust's
acquisition of three commercial properties and one apartment complex in 1996,
as well as acquisitions subsequent to June 30, 1996.
A provision for losses of $541,000 was recognized in the six months ended June
30, 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 $393,000 and $745,000 for the three
and six months ended June 30, 1995 to $469,000 and $851,000 for the three and
six months ended June 30, 1996. This increase is due to an increase in the
Trust's gross assets, the basis for the advisory fee, as a result of property
acquisitions 1995 and 1996. The advisory fee is expected to continue to
increase as the Trust makes additional property acquisitions.
18
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
Results of Operations (Continued)
General and administrative expenses increased from $264,000 and $629,000 for
the three and six months ended June 30, 1995 to $590,000 and $939,000 for the
three and six months ended June 30, 1996. This increase is primarily
attributable to an increase in legal fees and Advisor cost reimbursements.
The Trust's equity in earnings of partnerships was a loss of $213,000 for the
three months ended June 30, 1996 and income of $176,000 for the six months
ended June 30, 1996 as compared to income of $176,000 and $189,000 in the three
and six months ended June 30, 1996. Included in equity earnings of
partnerships for the six months ended June 30, 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 27 of its industrial
warehouses. Excluding such gain, the Trust's equity in earnings of
partnerships would have been a loss of $194,000 for the six months ended June
30, 1996. This decrease in equity in earnings of partnerships is primarily due
to the sale of 27 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 owned by SAC 9. See NOTE
2. "INVESTMENTS IN PARTNERSHIPS." Equity in earnings of partnerships is
expected to be minimal for the remainder of 1996.
For the three and six months ended June 30, 1996, the Trust recognized gains on
the sale of real estate of $378,000 on the sale of Rivertree Apartments in
February 1996 and $5.4 million on the sale of Sunset Towers Apartments in May
1996. See NOTE 4. "REAL ESTATE."
In the six months ended June 30, 1996, the Trust recognized an extraordinary
gain of $663,000, its equity share of an insurance settlement from a fire loss
on one of Indcon's industrial warehouses . See NOTE 2. "INVESTMENTS IN
PARTNERSHIPS."
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.
19
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
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
19A
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 14,870
<SECURITIES> 5,926
<RECEIVABLES> 8,807
<ALLOWANCES> 6,128
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 203,847
<DEPRECIATION> 17,372
<TOTAL-ASSETS> 221,825
<CURRENT-LIABILITIES> 0
<BONDS> 135,205
0
0
<COMMON> 0
<OTHER-SE> 80,168
<TOTAL-LIABILITY-AND-EQUITY> 221,824
<SALES> 0
<TOTAL-REVENUES> 21,770
<CGS> 0
<TOTAL-COSTS> 12,903
<OTHER-EXPENSES> 2,294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,063
<INCOME-PRETAX> (727)
<INCOME-TAX> 0
<INCOME-CONTINUING> (727)
<DISCONTINUED> 0
<EXTRAORDINARY> 663
<CHANGES> 0
<NET-INCOME> 5,911
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
</TABLE>
