<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
October 16, 1997
Date of Report (Date of Earliest Event Reported)
CONTINENTAL MORTGAGE AND EQUITY TRUST
(Exact Name of Registrant as Specified in its Charter)
California 0-10503 94-2738844
(State of Incorporation) (Commission (IRS Employer
File No.) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, TX 75231
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 692-4700
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On October 16, 1997, Continental Mortgage and Equity Trust (the "Trust")
purchased the Westgrove Air Plaza, a combination aircraft hangar and office
building in Addison, Texas, for $2.4 million (.9% of the Trust's assets at
December 31, 1996). The seller of the property was First National Bank and Trust
Company of McAlester. The property was constructed in 1982 and consists of
78,326 square feet which were 57% occupied at the date of acquisition. The Trust
paid $1.2 million in cash with the seller providing purchase money financing for
the remaining $1.2 million of the purchase price.
On October 31, 1997, the Trust purchased Cypresstree Apartments, an apartment
complex in Houston, Texas, for $3.2 million (1.3% of the Trust's assets at
December 31, 1996). The seller of the property was Allantee Holdings, Inc. The
property was constructed in 1980 and consists of 168 units which were 77%
occupied at the date of acquisition. The Trust paid $550,000 in cash and the
seller provided purchase money financing for the remaining $2.6 million of the
purchase price.
The purchase of these properties, when aggregated with other property purchases
the Trust has made in 1997 exceed 10% of the Trust's assets at December 31,
1996.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Pro forma financial information:
Pro forma statements of operations are presented for the year ended December 31,
1996 and the nine months ended September 30, 1997. A pro forma balance sheet as
of September 30, 1997 is also presented.
A summary of the pro forma transactions follows:
In October 1997, the Trust purchased Westgrove Air Plaza, a 78,326 square foot
combination aircraft hangar and office building in Addison, Texas, for $2.4
million. The Trust paid $1.2 million in cash with the seller providing purchase
money financing for the remaining $1.2 million of the purchase price. The
mortgage bears interest at a variable rate, currently 10.5% per annum, requires
monthly payments of interest only and matures in April 1998.
On October 31, 1997, the Trust purchased Cypresstree Apartments, a 168 unit
apartment complex in Houston, Texas, for $3.2 million. The Trust paid $550,000
in cash and the seller provided purchase money financing for the remaining $2.6
million of the purchase price. The purchase money financing bears interest at
10.0% per annum, requires monthly payments of interest only of $21,667 and
matures in December 1998.
The aggregate purchase prices of these properties are 2.2% of the Trust's assets
at December 31, 1996. Although not a significant acquisition in themselves, when
aggregated with the other purchases completed by the Trust in 1997 as described
below, such purchases constitute a significant acquisition.
2
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (Continued)
In addition to the purchases discussed above, the Trust has purchased three
apartment complexes, three commercial properties and four parcels of undeveloped
land in 1997. The properties, located in California, North Carolina, Texas,
Washington, D.C. and Florida, were purchased for a total of $59.8 million in
separate transactions from unaffiliated sellers and represent approximately 24%
of the Trust's assets at December 31, 1996. The Trust paid a total of $15.9
million in cash and financed the remainder of the purchase prices. The mortgages
bear interest at rates ranging from 8.0% to 10.5% per annum and mature from 1998
to 2009.
The Trust has previously provided audited statements of operations for the three
apartment complexes and three commercial properties acquired during 1997,
totaling $50.0 million or 19.0% of the Trust's assets at December 31, 1996. See
the Trust's Current Reports on Form 8-K, dated June 24, 1997, July 18, 1997 and
August 18, 1997.
In addition to the purchases described above, during 1997 the Trust has sold
three office buildings. In connection with the sales, the Trust received net
cash proceeds totaling $18.7 million, after the payoff of $17.3 million in
existing mortgage debt and the payment of various closing costs associated with
the sales. The Trust recognized a total gain on these sales of $8.2 million.
The pro forma statements of operations present the Trust's operations as if the
purchase and sale transactions described above had occurred at the beginning of
each of the periods presented.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
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CONTINENTAL MORTGAGE AND EQUITY TRUST
PRO FORMA
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Westgrove Cypresstree
Assets Actual Air Plaza Apartments Pro forma(1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Notes and interest receivable
Performing..................................................... $ 4,457 $ -- $ -- $ 4,457
Nonperforming, nonaccruing..................................... 1,626 -- -- 1,626
-------- -------- -------- --------
6,083 -- -- 6,083
Less - allowance for estimated losses............................. (1,481) -- -- (1,481)
-------- -------- -------- --------
4,602 -- -- 4,602
Foreclosed real estate held for sale, net of accumulated
depreciation................................................... 5,738 -- -- 5,738
Real estate held for sale, net of accumulated depreciation........ 8,982 -- -- 8,982
Real estate held for investment, net of accumulated depreciation 247,182 2,505 3,305 252,992
Investments in marketable equity securities of affiliates,
at market...................................................... 12,202 -- -- 12,202
Investments in partnerships....................................... 2,084 -- -- 2,084
Cash and cash equivalents......................................... 918 (1,317) (705) (1,104)
Other assets...................................................... 14,890 -- -- 14,890
-------- -------- -------- --------
$296,598 $ 1,188 $ 2,600 $300,386
======== ======== ======== ========
Liabilities and Shareholders' Equity Liabilities Notes and interest
payable........................................................... $199,245 $ 1,188 $ 2,600 $203,033
Other liabilities................................................. 10,192 -- -- 10,192
-------- -------- -------- --------
209,437 1,188 2,600 213,225
======== ======== ======== ========
Commitments and contingencies
Shareholders' equity
Shares of Beneficial Interest, no par value; authorized shares,
unlimited issued and outstanding 4,025,985 shares.............. 8,068 -- -- 8,068
Paid-in capital................................................... 257,159 -- -- 257,159
Accumulated distributions in excess of accumulated earnings....... (188,963) -- -- (188,963)
Net unrealizable gains on marketable equity securities............ 10,897 -- -- 10,897
-------- -------- -------- --------
87,161 -- -- 87,161
-------- -------- -------- --------
$296,598 $ 1,188 $ 2,600 $300,386
======== ======== ======== ========
</TABLE>
(1) The balance sheet effect of all other 1997 property purchases and sales are
included in the September 30, 1997 actual balances presented.
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CONTINENTAL MORTGAGE AND EQUITY TRUST
PRO FORMA
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Apartment Commercial
Actual Complexes(1)(2) Properties(1)(3) Land (1)(4)
-------- --------------- ---------------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rents.......................... $40,630 $ 892 $ 2,736 $ --
Interest....................... 729 -- -- --
------- ------------- ---------------- -----------
41,359 892 2,736 --
Expenses
Property operations............ 23,576 569 978 --
Interest....................... 12,245 365 976 254
Depreciation .................. 4,563 106 299 --
Advisory fee to affiliate...... 1,552 -- -- --
Net income fee................. 287 -- -- --
General and administrative..... 2,219 -- -- --
------- ------------- ---------------- -----------
44,442 1,040 2,253 254
------- ------------- ---------------- -----------
Income (loss) from operations..... (3,083) (148) 483 (254)
Equity in income of partnerships.. 56 -- -- --
Gain on sale of real estate....... 6,565 -- -- --
------- ------------- ---------------- -----------
Net income (loss)................. $ 3,538 $ (148) $ 483 $ (254)
======= ============= ================ ===========
Earnings per share
Net income..................... $ .88
=======
Shares of beneficial interest
outstanding.................... 4,026,061
=========
</TABLE>
<TABLE>
<CAPTION>
Westgrove Cypresstree
Air Plaza Apartments Sales(1) Pro forma
--------- ----------- -------- --------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rents.......................... $ 241 $ 533 $ (1,396) $43,636
Interest....................... -- -- -- 729
--------- ----------- -------- -------
241 533 (1,396) 44,365
Expenses
Property operations ........... 269 428 (799) 25,021
Interest....................... 94 195 (441) 13,688
Depreciation................... 38 50 (300) 4,756
Advisory fee to affiliate...... -- -- -- 1,552
Net income fee................. -- -- -- 287
General and administrative..... -- -- -- 2,219
--------- ----------- -------- -------
401 673 (1,540) 47,523
--------- ----------- -------- -------
Income (loss) from operations..... (160) (140) 144 (3,158)
Equity in income of partnerships.. -- -- -- 56
Gain on sale of real estate....... -- -- -- 6,565
--------- ----------- -------- -------
Net income (loss)................. $ (160) $ (140) $ 144 $ 3,463
========= =========== ========= =======
Earnings per share
Net income..................... $ .86
=======
Shares of beneficial interest
outstanding.................... 4,026,061
=========
</TABLE>
(1) Assumes purchase or sale by the Trust on January 1, 1997. Pro forma amounts
for other property acquisitions are from January 1 through respective dates
of acquisition. Results subsequent to the date of acquisition are included
in the "Actual" column.
(2) Includes the Lost Timbers Apartments, Trails at Windfern Apartments and
Eagle Rock Apartments whose results of operations are separately presented
in the Trust's Current Reports on Form 8-K, dated June 24, 1997 and August
18, 1997.
(3) Includes the Jefferson Office Building, Bay Plaza Office Center and Durham
Centre Office Building whose results of operations are separately presented
in the Trust's Current Reports on Form 8-K, dated June 24, 1997 and July
18, 1997.
(4) Includes the Stacy Road, Watters Road, Opubco and McKinney 140 land which
are separately presented in the Trust's Current Reports on Form 8-K, dated
June 24, 1997 and July 18, 1997.
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CONTINENTAL MORTGAGE AND EQUITY TRUST
PRO FORMA
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Apartment Commercial
Actual Complexes(1)(2) Properties(1)(3) Land (1)(4)
----------- --------------- ---------------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rents.......................... $ 44,244 $ 2,514 $ 6,994 $ -
Interest....................... 1,119 - - -
----------- --------------- --------------- -----------
45,363 2,514 6,994 -
Expenses
Property operations............ 26,738 1,544 2,525 -
Interest....................... 12,773 895 2,322 758
Depreciation................... 4,819 273 783 -
Advisory fee to affiliate...... 1,091 - - -
Incentive and net income fees.. 1,049 - - -
General and administrative..... 2,213 - - -
Provision for losses........... (884) - - -
----------- --------------- --------------- -----------
47,799 2,712 5,630 758
----------- --------------- --------------- -----------
Income (loss) from operations.... (2,436) (198) 1,364 (758)
Equity in income of partnerships. 228 - - -
Gain on sale of real estate and
marketable equity securities... 10,122 - - -
----------- --------------- --------------- -----------
Income (loss) before
extraordinary gain............. 7,914 (198) 1,364 (758)
Extraordinary gain............... 812 - - -
----------- --------------- --------------- -----------
Net income (loss)................ $ 8,726 $ (198) $ 1,364 $ (758)
=========== =============== =============== ===========
Earnings per share
Income before extraordinary
gain......................... $ 1.89
Extraordinary gain............. .19
----------
Net income (loss).............. $ 2.08
==========
Shares of beneficial interest
outstanding.................... 4,199,147
==========
</TABLE>
<TABLE>
<CAPTION>
Westgrove Cypresstree
Air Plaza Apartments Sales(1) Pro forma
---------- ------------ -------------- --------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Income
Rents.......................... $ 321 $ 711 $ (1,986) $ 52,798
Interest....................... - - - 1,119
---------- ------------ -------------- --------------
321 711 (1,986) 53,917
Expenses
Property operations............ 358 570 (1,059) 30,676
Interest....................... 125 260 (801) 16,332
Depreciation................... 51 66 (277) 5,715
Advisory fee to affiliate...... - - - 1,091
Incentive and net income fees.. - - - 1,049
General and administrative..... - - - 2,213
Provision for losses........... - - - (884)
---------- ------------ -------------- --------------
534 896 (2,137) 56,192
---------- ------------ -------------- --------------
Income (loss) from operations.... (213) (185) 151 (2,275)
Equity in income of partnerships. - - - 228
Gain on sale of real estate and
marketable equity securities... - - 6,565 16,687
---------- ------------ -------------- --------------
Income (loss) before
extraordinary gain............. (213) (185) 6,716 14,640
Extraordinary gain............... - - 812
---------- ------------ -------------- --------------
Net income (loss)................ $ (213) $ (185) $ 6,716 $ 15,452
========== ============ ============== ==============
Earnings per share
Income before extraordinary
gain......................... $ 3.49
Extraordinary gain............. .19
--------------
Net income (loss).............. $ 3.68
==============
Shares of beneficial interest
outstanding.................... 4,199,147
==============
</TABLE>
(1) Assumes purchase or sale by the Trust on January 1, 1996.
(2) Includes the Lost Timbers Apartments, Trails at Windfern Apartments and
Eagle Rock Apartments whose results of operations are separately presented
in the Trust's Current Reports on Form 8-K, dated June 24, 1997 and August
18, 1997.
(3) Includes the Jefferson Office Building, Bay Plaza Office Center and Durham
Centre Office Building whose results of operations are separately presented
in the Trust's Current Reports on Form 8-K, dated June 24, 1997 and July
18, 1997.
(4) Includes the Stacy Road, Watters Road, Opubco and McKinney 140 land which
are separately presented in the Trust's Current Reports on Form 8-K, dated
June 24, 1997 and July 18, 1997.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (Continued)
(b) Financial statements of properties acquired:
Exhibit
Number Description
- ------- -----------
99.0 Lost Timbers Apartments, Audited Statement of Revenues and Direct
Operating Expenses for the year ended December 31, 1996 (incorporated
by reference to Exhibit No. 99.0 to the Registrant's Current Report on
Form 8-K, dated June 24, 1997).
99.1 Jefferson Building, Audited Statement of Revenues and Direct Operating
Expenses for the year ended December 31, 1996 (incorporated by
reference to Exhibit No. 99.1 to the Registrant's Current Report on
Form 8-K, dated June 24, 1997).
99.2 Trails at Windfern Apartments, Audited Statement of Revenues and
Direct Operating Expenses for the year ended December 31, 1996
(incorporated by reference to Exhibit No. 99.2 to the Registrant's
Current Report on Form 8-K, dated June 24, 1997).
99.3 Bay Plaza Office Center, Audited Statement of Revenues and Direct
Operating Expenses for the year ended December 31, 1996 (incorporated
by reference to Exhibit No. 99.3 to the Registrant's Current Report on
Form 8-K, dated June 24, 1997).
99.4 Durham Centre, Audited Statement of Revenues and Direct Operating
Expenses for the year ended December 31, 1996 (incorporated by
reference to Exhibit No. 99.4 to the Registrant's Current Report on
Form 8-K, dated July 18, 1997).
99.5 Eagle Rock Apartments, Audited Statement of Revenues and Direct
Operating Expenses for the year ended December 31, 1996, (incorporated
by reference to Exhibit 99.5 to Registrant's Current Report on Form
8-K, dated August 18, 1997).
99.6 Westgrove Air Plaza, Audited Statement of Revenues and Direct
Operating Expenses for the year ended May 31, 1997, filed herewith.
7
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SIGNATURE
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 hereto duly authorized.
CONTINENTAL MORTGAGE AND EQUITY TRUST
Date: December 22, 1997 By: /s/ Thomas A. Holland
------------------------- -------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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CONTINENTAL MORTGAGE AND EQUITY TRUST
EXHIBIT TO ITS
CURRENT REPORT ON FORM 8-K
Dated October 16, 1997
Exhibit Page
Number Description Number
- ------- ----------- ------
99.6 Westgrove Air Plaza, Audited Statement of 10
Revenue and Direct Operating Expenses for
the year ended February 28, 1997.
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EXHIBIT 99.6
WESTGROVE AIR PLAZA
STATEMENT OF REVENUES
AND DIRECT OPERATING EXPENSES
YEAR ENDED MAY 31, 1997
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Independent Auditors' Report
To the Board of Trustees
Continental Mortgage & Equity Trust
We have audited the accompanying statement of revenues and direct operating
expenses of Westgrove Air Plaza for the year ended May 31, 1997. This statement
of revenues and direct operating expenses is the responsibility of the
Property's management. Our responsibility is to express an opinion on this
statement of revenues and direct operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues and direct operating expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of revenues and
direct operating expenses. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement of revenues and direct operating expenses
presentation. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying financial statement is prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
inclusion in Form 8-K of Continental Mortgage & Equity Trust) and, as described
in Note 1, is not intended to be a complete presentation of the results of
operations.
In our opinion, the statement of revenues and direct operating expenses referred
to above presents fairly, in all material respects, the revenues and direct
operating expenses of Westgrove Air Plaza for the year ended May 31, 1997, in
conformity with generally accepted accounting principles.
Farmer, Fuqua, Hunt & Munselle, P.C.
Dallas, Texas
December 12, 1997
11
<PAGE> 3
WESTGROVE AIR PLAZA
STATEMENT OF REVENUES
AND DIRECT OPERATING EXPENSES
Year Ended May 31, 1997
<TABLE>
<S> <C>
REVENUES
Net rental revenues $ 320,449
Other revenues 737
----------
Total revenues 321,186
DIRECT OPERATING EXPENSES
Utilities 114,873
Repairs and maintenance 90,265
Ground rent 85,404
Property taxes 44,760
Insurance 13,027
Salaries and benefits 9,795
----------
Total direct operating expenses 358,124
----------
DIRECT OPERATING EXPENSES IN EXCESS OF REVENUES $ (36,938)
==========
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE> 4
WESTGROVE AIR PLAZA
NOTES TO STATEMENT OF REVENUES
AND DIRECT OPERATING EXPENSES
May 31, 1997
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
Westgrove Air Plaza is an 83,832 square foot office building
with three airplane hangars, located in Addison, Texas. During
the period ended May 31, 1997, the property was owned by First
National Bank and Trust Co. of McAlester (Oklahoma).
The accompanying financial statement does not include a
provision for depreciation and amortization, bad debt expense,
interest expense or income taxes. Accordingly, this statement
is not intended to be a complete presentation of the results
of operations.
NOTE 2: ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3: LEASE COMMITMENT
Westgrove Air Plaza rents land under two ground leases
classified as operating leases, both of which expire in
February, 2022. Future minimum lease payments under the leases
are approximately as follows:
<TABLE>
<CAPTION>
Year ended May 31,
-----------------
<S> <C> <C>
1998 $ 54,000
1999 54,000
2000 54,000
2001 54,000
2002 54,000
Thereafter 1,074,000
-------------
$ 1,344,000
=============
</TABLE>
NOTE 4: SUBSEQUENT EVENT
The property was sold to Continental Mortgage & Equity Trust,
a California trust, on October 16, 1997.
13
