-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FumyWHBRvPPvKABgEtrLzFhTv8sl4X0lfRuT/C+CghXdcBqDYxmXIhOn02k4OuTh MwSgkAXchqewvQLEGMq4JA== 0000930661-99-002802.txt : 19991209 0000930661-99-002802.hdr.sgml : 19991209 ACCESSION NUMBER: 0000930661-99-002802 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL MORTGAGE & EQUITY TRUST CENTRAL INDEX KEY: 0000319416 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 942738844 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-10503 FILM NUMBER: 99770675 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPWY STE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED CAPITAL SPECIAL TRUST DATE OF NAME CHANGE: 19901122 10-Q/A 1 FORM 10-Q/A 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 SEPTEMBER 30, 1999 ------------------ 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 --- --- Shares of Beneficial Interest, no par value 4,024,596 - ------------------------------ --------------------------------- (Class) (Outstanding at October 29, 1999) 1 This Form 10-Q/A amends the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1999 as follows: PART II - OTHER INFORMATION, ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS - page 19. 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
September 30, December 31, 1999 1998 ------------ ------------ (dollars in thousands) Assets ------ Notes and interest receivable Performing.......................................... $ 649 $ 2,069 Nonperforming....................................... - 1,557 -------- -------- 649 3,626 Less - allowance for estimated losses................ (250) (250) -------- -------- 399 3,376 Foreclosed real estate held for sale, net of accumulated depreciation ($608 in 1999 and $698 in 1998)............................................ 2,830 3,325 Real estate held for investment, net of accumulated depreciation ($29,637 in 1999 and $25,590 in 1998) 278,926 294,227 Investment in marketable equity securities of affiliate, at market................................ 14,109 14,417 Cash and cash equivalents............................ 3,965 2,156 Other assets (including $4,493 in 1999 and $1,251 in 1998 from affiliates)............................ 18,465 16,287 -------- -------- $318,694 $333,788 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED BALANCE SHEETS - Continued
September 30, December 31, 1999 1998 ------------- ------------ (dollars in thousands) Liabilities and Shareholders' Equity ------------------------------------ Liabilities Notes and interest payable.......................... $ 219,278 $ 233,693 Other liabilities (including $52 in 1999 and $1,295 in 1998 to affiliates)...................... 12,006 12,742 --------- --------- 231,284 246,435 Commitments and contingencies Shareholders' equity Shares of Beneficial Interest, no par value; authorized shares, unlimited; issued and out- standing, 4,023,467 shares in 1999 and 4,021,181 shares in 1998..................................... 8,058 8,054 Paid-in capital..................................... 257,121 257,093 Accumulated distributions in excess of accumulated earnings........................................... (190,520) (190,906) Net unrealized gains on marketable equity securities......................................... 12,751 13,112 --------- --------- 87,410 87,353 --------- --------- $ 318,694 $ 333,788 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------- ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ----------- (dollars in thousands, except per share) Revenue Rents......................... $ 15,872 $ 16,539 $ 49,764 $ 47,287 Interest and other income...... 191 168 316 539 ---------- ---------- ---------- ----------- 16,063 16,707 50,080 47,826 Expenses Property operations........... 9,743 10,202 28,849 27,636 Interest...................... 5,032 5,777 15,832 15,934 Depreciation.................. 1,986 2,005 6,073 6,074 Advisory fee to affiliate..... 582 632 1,826 1,838 Net income fee to affiliate. (64) (140) 178 58 General and administrative..... 531 504 1,893 1,643 ---------- ---------- ---------- ----------- 17,810 18,980 54,651 53,183 ---------- ---------- ---------- ----------- (Loss) from operations.......... (1,747) (2,273) (4,571) (5,357) Equity in income of partnerships.................. 53 38 164 108 Gain on sale of real estate..... 917 454 6,600 5,916 ---------- ---------- ---------- ----------- Net income (loss)............... $ (777) $ (1,781) $ 2,193 $ 667 ========== ========== ========== =========== Earnings per share Net income (loss)............. $ (.19) $ (.44) $ .55 $ .17 ========== ========== ========== =========== Weighted average shares of beneficial interest used in computing earnings per share 4,023,393 4,012,507 4,022,199 4,011,072 ========== ========== ========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Shares of Distributions Accumulated Beneficial Interest in Excess of Other --------------------------- Paid-in Accumulated Comprehensive Shareholders' Shares Amount Capital Earnings Income Equity ------------- ------------ ----------- ------------- ------------- ------------- (dollars in thousands, except per share) Balance, January 1, 1999..................... 4,021,181 $ 8,054 $ 257,093 $ (190,906) $ 13,112 $ 87,353 Comprehensive Income Net income.................................. - - - 2,193 - 2,193 Unrealized (losses) on marketable equity securities................................. - - - - (361) (361) ------------- 1,832 Shares of beneficial interest sold under dividend reinvestment plan........................................ 2,288 4 28 - - 32 Fractional shares of beneficial interest acquired.................................... (2) - - - - - Distributions ($.45 per share)............... - - - (1,807) - (1,807) ------------- ------------ ----------- ------------- ------------- ------------- Balance, September 30, 1999.................. 4,023,467 $ 8,058 $ 257,121 $ (190,520) $ 12,751 $ 87,410 ============= ============ =========== ============= ============= =============
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, --------------------- 1999 1998 --------- --------- (dollars in thousands) Cash Flows from Operating Activities Rents collected.................................... $ 49,881 $ 47,246 Interest collected................................. 154 384 Interest paid...................................... (15,051) (14,773) Payments for property operations................... (26,471) (28,070) General and administrative expenses paid........... (1,840) (1,569) Advisory and net income fee paid to affiliate...... (1,087) (2,146) Distributions from partnerships' operating cash flow.............................................. 134 80 Other.............................................. (1,376) (77) --------- --------- Net cash provided by operating activities........ 4,344 1,075 Cash Flows from Investing Activities Acquisition of real estate......................... (273) (46,917) Real estate improvements........................... (6,288) (4,345) Proceeds from sale of real estate.................. 27,481 22,156 Sale of notes receivable........................... 1,452 304 Collections on notes receivable.................... 45 375 Deposits on pending acquisitions and financings.... (441) (77) Deferred financing costs........................... (970) (2,147) Deferred costs on approved merger.................. (166) (440) --------- --------- Net cash provided by (used in) investing activities...................................... 20,840 (31,091) Cash Flows from Financing Activities Distributions to shareholders...................... (1,807) (1,804) Proceeds from notes payable and margin borrowings 25,549 62,844 Payments on notes payable and margin borrowings.... (43,056) (27,835) Advances to affiliates............................. (4,093) (1,812) Repurchase of shares of beneficial interest........ - (240) Shares of beneficial interest sold under dividend reinvestment plan................................. 32 172 --------- --------- Net cash provided by (used in) financing activities...................................... (23,375) 31,325 --------- --------- Net increase in cash and cash equivalents............. 1,809 1,309 Cash and cash equivalents, beginning of period........ 2,156 3,088 --------- --------- Cash and cash equivalents, end of period.............. $ 3,965 $ 4,397 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months Ended September 30, --------------------- 1999 1998 --------- --------- (dollars in thousands) Reconciliation of net income to net cash provided by operating activities Net income.......................................... $ 2,193 $ 667 Adjustments to reconcile net income to net cash provided by operating activities Depreciation....................................... 6,073 6,074 Gain on sale of real estate........................ (6,600) (5,916) (Increase) decrease in interest receivable......... 19 (82) Decrease in other assets........................... 1,952 1,918 Increase (decrease) in other liabilities........... 853 (1,590) Increase (decrease) in interest payable............ (116) 32 Distributions from partnerships' operating cash flow.............................................. 134 80 Equity in (income) of partnerships................. (164) (108) ------- ------- Net cash provided by operating activities..... $ 4,344 $ 1,075 ======= ======= Noncash investing and financing activities Notes payable from acquisition of real estate...... $ 2,700 $ - Unrealized gain (loss) on marketable equity securities........................................ (361) 477 Note receivable from sale of real estate........... - 467
The accompanying notes are an integral part of these Consolidated Financial Statements. 7 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION - ------------------------------ The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the nine month period ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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, 1998 ("1998 Form 10-K"). NOTE 2. MORTGAGE NOTES RECEIVABLE - ---------------------------------- In February 1999, the Trust sold, to the underlying lienholder, its mortgage note receivable secured by the Cypress Creek Office Building in Ft. Lauderdale, Florida, for $1.6 million, receiving net cash of $111,000 after paying off $1.4 million in mortgage debt and the payment of various closing costs. The purchaser has no recourse to the Trust if the note should not be collected in full. A gain of $152,000 was recognized on the sale. 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 matured in October 1998. The Trust had also guaranteed the underlying first lien mortgage secured by the property, which also matured in October 1998. The Trust ceased recognizing interest income on the note in June 1996. In February 1999, the Trust obtained ownership of the partnership that owns the property. The partnership refinanced the property in the amount $2.7 million, receiving no net cash after paying off the matured $2.6 million first lien and the payment of various closing costs. The new mortgage bears interest at 8.5% per annum, requires monthly payments of principal and interest of $23,000 and matures in February 2004. The Trust incurred no loss as the fair value of the property exceeded the carrying value of the Trust's note receivable and assumed first lien mortgage. The property is included in real estate held for investment in the accompanying Consolidated Balance Sheet. NOTE 3. REAL ESTATE - -------------------- In January 1999, the Trust purchased a ground lease under the 1010 Common Office Building in New Orleans, Louisiana, for $273,000 in cash, including a real estate brokerage commission of $10,000 paid to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Trust's advisor, and an acquisition fee of $3,000 paid to BCM. 8 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3. REAL ESTATE (Continued) - -------------------- In April 1999, the Trust sold the 74,000 sq. ft. 3400 Carlisle Office Building in Dallas, Texas, for $6.1 million, receiving net cash of $1.1 million after paying off $4.6 million in mortgage debt, including a $166,000 prepayment penalty, and the payment of various closing costs, including a real estate brokerage commission of $193,000 to Carmel Realty. A gain of $48,000 was recognized on the sale. In May 1999, the Trust sold the 104,001 sq. ft. Hampton Court Office Building in Dallas, Texas, for $11.3 million, receiving net cash of $5.6 million after paying off $6.2 million in mortgage debt, including a $252,000 prepayment penalty, and the payment of various closing costs, including a real estate brokerage commission of $281,000 to Carmel Realty. A gain of $2.3 million was recognized on the sale. In June 1999, the Trust sold the 57 unit Pierce Tower Apartments in Denver, Colorado, for $3.8 million, receiving net cash of $1.5 million after paying off $1.9 million in mortgage debt, including a $20,000 prepayment penalty, and the payment of various closing costs, including a real estate brokerage commission of $133,000 to Carmel Realty. A gain of $1.0 million was recognized on the sale. Also in June 1999, the Trust sold the 208,386 sq. ft. Northgate Industrial Warehouse in Marietta, Georgia, for $6.7 million, receiving net cash of $1.9 million after the payment of various closing costs, including a real estate brokerage commission of $205,000 to Carmel Realty, and the purchaser's assumption of $4.6 million in mortgage debt. A gain of $2.2 million was recognized on the sale. In September 1999, the Trust sold the 64 unit Shadowridge Apartments in Rock Springs, Wyoming, for $1.5 million, receiving net cash of $1.4 million after the payment of various closing costs, including a real estate brokerage commission of $60,000 to Carmel Realty. A gain of $917,000 was recognized on the sale. NOTE 4. NOTES PAYABLE - ---------------------- In March 1999, the Trust refinanced the mortgage debt secured by the 99 unit Eagle Rock Apartments in Los Angeles, California, in the amount of $3.3 million, paying net cash of $83,000 to pay off $3.3 million in mortgage debt and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $33,000 to BCM. The new mortgage bears interest at 7.33% per annum, requires monthly payments of principal and interest of $22,609 and matures in April 2009. Also in March 1999, the Trust refinanced the mortgage debt secured by the 240 unit Trails of Windfern Apartments in Houston, Texas, in the amount of $3.8 million, receiving net cash of $414,000 after paying off $3.3 million in mortgage debt and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $38,000 to 9 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4. NOTES PAYABLE (Continued) - ---------------------- BCM. The new mortgage bears interest at 7.23% per annum, requires monthly payments of principal and interest of $25,871 and matures in April 2009. Further in March 1999, the Trust refinanced the mortgage debt secured by the 168 unit Ashley Crest Apartments in Houston, Texas, in the amount of $2.9 million, receiving net cash of $54,000 after paying off $2.6 million in mortgage debt and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $29,000 to BCM. The new mortgage bears interest at 7.12% per annum, requires monthly payments of principal and interest of $19,191 and matures in April 2009. In April 1999, the Trust refinanced the mortgage debt secured by the 63,504 sq. ft. Brookfield Corporate Center in Chantilly, Virginia, in the amount of $2.9 million, receiving net cash of $62,000 after paying off $2.7 million in mortgage debt and the payment of various costs, including a mortgage brokerage and equity refinancing fee of $29,000 to BCM. The new mortgage bears interest at 7.71% per annum, requires monthly payments of principal and interest of $21,678 and matures in May 2009. Also in April 1999, the Trust refinanced the mortgage debt secured by the 166 unit Fountain Lake Apartments in Texas City, Texas, in the amount of $2.6 million, receiving net cash of $89,000 after paying off $2.4 million in mortgage debt and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $26,000 to BCM. The new mortgage bears interest at 7.56% per annum, requires monthly payments of principal and interest of $19,018 and matures in May 2002. In June 1999, the Trust refinanced the mortgage debt secured by the 190 unit El Chaparral Apartments in San Antonio, Texas, in the amount of $4.3 million, receiving net cash of $1.5 million after paying off $2.6 million in mortgage debt and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $43,000 to BCM. The new mortgage bears interest at 8.0% per annum, requires monthly payments of principal and interest of $31,405 and matures in July 2009. In September 1999, the Trust refinanced the mortgage debt secured by the 178 unit Parkwood Knoll Apartments in San Bernadino, California, in the amount of $5.5 million, receiving net cash of $595,000 after paying off $4.8 million in mortgage debt and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $55,000 to BCM. The new mortgage bears interest at a variable rate, currently 8.75% per annum, requires monthly payments of principal and interest and matures in September 2006. 10 CONTINENTAL MORTGAGE AND EQUITY TRUST ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 5. OPERATING SEGMENTS - --------------------------- Significant differences among the accounting policies of the Trust's operating segments as compared to the Trust's consolidated financial statements principally involve the calculation and allocation of general and administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their operating income and cash flow. The Trust based reconciliation of expenses that are not reflected in the segments is $1.9 million and $1.6 million for the nine months ended September 30, 1999 and 1998, respectively, of general and administrative expenses. There are no intersegment revenues and expenses and the Trust conducts all of its business within the United States. Presented below is the operating income of each of the Trust's reportable operating segments for the nine months ended September 30, and each segment's assets at September 30.
Commercial 1999 Land Properties Apartments Total - -------- ---------- ---------- ---------- -------- Rents........................ $ 9 $ 21,373 $ 28,382 $ 49,764 Property operating expenses.. 128 12,549 16,172 28,849 ---------- ---------- ---------- -------- Operating income (loss)...... $ (119) $ 8,824 $ 12,210 $ 20,915 ========== ========== ========== ======== Depreciation................. $ - $ 3,423 $ 2,650 $ 6,073 Interest on debt............. 1,235 7,049 7,392 15,676 Real estate improvements..... - 6,149 139 6,288 Assets....................... 26,240 133,373 122,143 281,756 Property sales: Commercial Properties Apartments Total ---------- ---------- -------- Sales price................. $ 24,162 $ 5,250 $ 29,412 Cost of sales............... 19,632 3,332 22,964 ---------- ---------- -------- Gain on sales............... $ 4,530 $ 1,918 $ 6,448 ========== ========== ======== Commercial 1998 Land Properties Apartments Total - -------- ---------- ---------- ---------- -------- Rents........................ $ 5 $ 20,063 $ 27,219 $ 47,287 ---------- ---------- ---------- -------- Property operating expenses.. 96 10,639 16,686 27,421 ---------- ---------- ---------- -------- Operating income (loss)...... $ (91) $ 9,424 $ 10,533 $ 19,866 ========== ========== ========== ======== Depreciation................. $ - $ 3,560 $ 2,514 $ 6,074 Interest on debt............. 810 7,737 7,179 15,726 Real estate improvements..... - 3,433 912 4,345 Assets....................... 27,933 137,732 128,171 293,836 Property sales: Commercial Properties Apartments Total ---------- ---------- -------- Sales price.................. $ 11,435 $ 12,125 $ 23,560 Cost of sales................ 11,136 6,508 17,644 ---------- ---------- -------- Gain on sales................ $ 299 $ 5,617 $ 5,916 ========== ========== ========
11 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 October 1999, the Trust obtained second lien financing secured by the 160 unit Oak Run Apartments in Pasadena, Texas, in the amount of $2.1 million, receiving net cash of $1.8 million after the funding of required escrows and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $19,000 to BCM. The second lien mortgage bears interest at 8.125% per annum, requires monthly payments of principal and interest of $14,520 and matures in October 2004. ------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS --------------------- Introduction - ------------ The Trust invests in real estate through direct ownership and partnerships and invests in mortgage loans, 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 totaled $4.0 million at September 30, 1999, compared to $2.2 million at December 31, 1998. The principal reasons for the increase in cash are discussed in the paragraphs below. The Trust's principal sources of cash have been and will continue to be property operations, proceeds from property sales and borrowings. Management expects that net cash provided by operating activities and from external sources, such as property sales, financings and refinancings, will be sufficient to meet the Trust's various cash needs during the remainder of 1999, 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 to $23.4 million in the nine months ended September 30, 1999, from $19.2 million in the nine months ended September 30, 1998. Of this net increase, $649,000 was due to the acquisition of three income producing properties 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- in 1998 and one in 1999, $800,000 was due to a tenant lease buyout, $1.6 million was due to the payment in 1998 of expenses accrued at December 31, 1997, and $2.5 million was due to increased occupancy at the Trust's commercial and residential properties. The increase was partially offset by a decrease of $1.3 million due to the sale of three commercial properties and two apartments in 1999 and three commercial properties and an apartment in 1998. Management believes that this trend of increasing cash flow from property operations will continue as it benefits from the properties purchased in 1998 and 1999 and assuming the economy remains stable or improves. Interest collected on mortgage notes receivable decreased to $71,000 in 1999 from $193,000 in 1998. The decrease was primarily due to the collection of two notes receivable in 1998 and the sale of five notes receivable in 1998 and one note receivable in 1999. Miscellaneous interest income collected decreased to $83,000 in 1999 from $191,000 in 1998 due to a decrease in short-term investments. Interest is expected to continue to decrease as a source of cash as the Trust has determined that generally, it will not actively seek to originate new mortgage loans other than those resulting from the Trust providing purchase money financing in connection with a property sale. Interest paid increased to $15.1 million in 1999 from $14.8 million in 1998. This increase was primarily attributable to interest paid on mortgages secured by three leveraged property purchases in 1998 and one mortgage secured by a commercial building obtained in 1999; four borrowings in 1998 secured by mortgages on previously unencumbered properties; and interest paid on new mortgages resulting from the refinancing of five properties in 1998 and seven properties in 1999 where the loan balance was increased. Interest paid is expected to continue to increase as additional properties are purchased on a leveraged basis, financing is obtained on unencumbered properties and additional properties are refinanced with an increase in the loan balance. General and administrative expenses paid increased to $1.8 million in 1999 from $1.6 million in 1998. The increase is due to an increase in franchise taxes. Under its advisory agreement, all or a portion of the annual advisory fee must be refunded by BCM, the Trust's advisor, if the operating expenses of the Trust exceed certain limits specified in the Trust's Declaration of Trust. The Trust received a refund of $981,000 of its 1998 advisory fee in March 1999 as compared to having received $606,000 of its 1997 advisory fee in March 1998. In January 1999, a ground lease under the 1010 Common Office Building was purchased for $273,000 in cash. In February 1999, the mortgage note receivable secured by the Cypress Creek Office Building in Ft. Lauderdale, Florida, was sold to the under- 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- lying lienholder for $1.6 million. Net cash of $111,000 was received after paying off $1.4 million in mortgage debt and the payment of various closing costs. In March 1999, the mortgage debt secured by the Eagle Rock Apartments in Los Angeles, California, was refinanced in the amount of $3.3 million. A net cash payment of $83,000 was necessary to pay off $3.3 million in mortgage debt and pay various closing costs. Also in March 1999, the mortgage debt secured by the Trails of Windfern Apartments in Houston, Texas, was refinanced in the amount of $3.8 million. Net cash of $414,000 was received after paying off $3.3 million in mortgage debt and the payment of various closing costs. Further in March 1999, the mortgage debt secured by the Ashley Crest Apartments in Houston, Texas, was refinanced in the amount of $2.9 million. Net cash of $54,000 was received after paying off $2.6 million in mortgage debt and the payment of various closing costs. In April 1999, the mortgage debt secured by the Brookfield Corporate Center in Chantilly, Virginia, was refinanced in the amount of $2.9 million. Net cash of $62,000 was received after paying off $2.7 million in mortgage debt and the payment of various closing costs. Also in April 1999, the 3400 Carlisle Office Building in Dallas, Texas, was sold for $6.1 million. Net cash of $1.1 million was received after paying off $4.6 million in mortgage debt, including a $166,000 prepayment penalty, and the payment of various closing costs. Further in April 1999, the mortgage debt secured by the Fountain Lake Apartments in Texas City, Texas, was refinanced in the amount of $2.6 million. Net cash of $89,000 was received after paying off $2.4 million in mortgage debt and the payment of various closing costs. In May 1999, the Hampton Court Office Building in Dallas, Texas, was sold for $11.3 million. Net cash of $5.6 million was received after paying off $6.2 million in mortgage debt, including a $252,000 prepayment penalty, and the payment of various closing costs. In June 1999, the Pierce Tower Apartments in Denver, Colorado, was sold for $3.8 million. Net cash of $1.5 million was received after paying off $1.9 million in mortgage debt, including a $20,000 prepayment penalty, and the payment of various closing costs. Also in June 1999, the Northgate Industrial Warehouse in Marietta, Georgia, was sold for $6.7 million. Net cash of $1.9 million was received after the payment of various closing costs and the purchaser's assumption of $4.6 million in mortgage debt secured by the property. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- Further in June 1999, the mortgage debt secured by the El Chaparral Apartments in San Antonio, Texas, was refinanced in the amount of $4.3 million. Net cash of $1.5 million was received after paying off $2.6 million in mortgage debt and the payment of various closing costs. In September 1999, the Shadowridge Apartments in Rock Spring, Wyoming, was sold for $1.5 million. Net cash of $1.4 million was received after payment of various closing costs. Also in September 1999, the mortgage debt secured by the Parkwood Knoll Apartments in San Bernadino, California, was refinanced in the amount of $5.5 million. Net cash of $595,000 was received after paying off $4.8 million in mortgage debt and the payment of various closing costs. In October 1999, second lien mortgage financing secured by the Oak Run Apartments in Pasadena, Texas, was obtained in the amount of $2.1 million. Net cash of $1.8 million was received after the funding of required escrows and the payment of various closing costs. In April 1998, the Trust's Board of Trustees authorized the Trust to repurchase a total of 200,000 of its shares of beneficial interest. No shares have been purchased under this authorization. In the first nine months of 1999, the Trust paid distributions of $.45 per share, or a total of $1.8 million and sold 2,288 shares of beneficial interest through its dividend reinvestment plan for a total of $32,000. Management reviews the carrying value of the Trust's properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The mortgage note receivable review includes an evaluation of the collateral property securing such 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, a review of the property's cash flow, discussions with the manager of the property and a review of properties in the surrounding area. Results of Operations - --------------------- The Trust had a net loss of $777,000 and net income of $2.2 million in the three and nine months ended September 30, 1999, including gains on sale of real estate and a mortgage note receivable of $917,000 and $6.6 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Results of Operations (Continued) - --------------------- million, compared to a net loss of $1.8 million and net income of $667,000 in the three and nine months ended September 30, 1998, which included gains on sale of real estate of $454,000 and $5.9 million. Fluctuations in these and other components of the Trust's revenues and expenses between the 1998 and 1999 periods are discussed below. Rents were $15.9 million and $49.8 million in the three and nine months ended September 30, 1999, compared to $16.5 million and $47.3 million in 1998. Of the increases, $696,000 and $3.7 million were attributable to the acquisition of one apartment and two commercial properties in 1998 and one commercial property in 1999. An increase of $805,000 was due to a tenant lease buyout at a commercial property. The remainder of the increase was due to increased rental and occupancy rates at the Trust's apartments and commercial properties. These increases were partially offset by decreases of $1.6 million and $2.6 million due to the sale of three commercial properties and an apartment in 1998 and three commercial properties and two apartments in 1999. Rents are expected to increase during the remainder of 1999 due to a full year of revenue from properties acquired in 1998 and 1999. Interest and other income increased to $191,000 from $168,000 in the three months and decreased to $316,000 from $539,000 in the nine months ended September 30, 1999. The three month increase was due to $104,000 in lawsuit settlement payments. The decrease for the nine months is due to the collection of two notes receivable and the sale of five notes receivable in 1998 and the sale of a note receivable in 1999 and by a decrease in short-term investment income partially offset by $174,000 in lawsuit settlement payments. Interest income and other income is expected to be insignificant in the remainder of 1999. Property operating expenses were $9.7 million and $10.2 million in the three months and $28.8 million and $27.6 million in the nine months ended September 30, 1999 and 1998. Of the increases, $545,000 and $3.0 million were due to the acquisition of one apartment and two commercial properties in 1998 and one commercial property in 1999. These increases were partially offset by decreases of $404,000 and $532,000 due to decreases in property replacement expenses and by decreases of $641,000 and $1.3 million due to the sale of three commercial properties and two apartments in 1998 and the sale of three commercial properties and an apartment in 1999. Property operating expenses are expected to increase during the remainder of 1999 due to a full year of operations of properties acquired in 1998 and 1999. Interest expense decreased to $5.0 million and $15.8 million in the three and nine months ended September 30, 1999, from $5.8 million and $15.9 million in 1998. Of the decreases, $81,000 and $656,000 were due to interest expense recorded on mortgages secured by three leveraged property purchases in 1998 and one mortgage secured by a commercial building obtained in 1999. An additional $133,000 and $571,000 were due to interest expense recorded on borrowings in 1998, secured by mortgages 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Results of Operations (Continued) - --------------------- on four previously unencumbered land parcels and the refinancing of four mortgages in 1998 and seven in 1999 where the loan balance was increased. These increases were partially offset by decreases of $561,000 and $1.1 million due to the sale of three commercial properties and an apartment in 1998 and the sale of three commercial properties, two apartments and a note receivable in 1999. An additional decrease of $300,000 for the three and nine months ended September 30, 1999, is due to participation interest accrued in the third quarter which was subsequently reversed in the fourth quarter when it was determined that it was not collectible. Interest expense is expected to increase in the remainder of 1999 as a result of a full year of interest expense on properties acquired or refinanced in 1998 and in the first nine months of 1999. Depreciation was $2.0 million and $6.1 million in the three and nine months ended September 30, 1999, comparable to the $2.0 million and $6.1 million in 1998. Advisory fee to affiliate was $582,000 and $1.8 million in the three and nine months ended September 30, 1999, comparable to the $632,000 and $1.8 million in 1998. The Trust recorded a net income fee of ($64,000) and $178,000 in the three and nine months ended September 30, 1999, as compared to ($140,000) and $58,000 in the three and nine months ended September 30, 1998. Such fee is based upon 7.5% of net income before such fee. General and administrative expenses increased to $531,000 and $1.9 million in the three and nine months ended September 30, 1999, from $504,000 and $1.6 million in 1998. The increase was due to an increase in franchise and other corporate taxes. The Trust's equity in earnings of partnerships of $53,000 and $164,000 in the three and nine months ended September 30, 1999, was comparable to the $38,000 and $108,000 in 1998. In the three and nine months ended September 30, 1999, gains on the sale of real estate and a mortgage note receivable totaling $917,000 and $6.6 million were realized, $152,000 on the sale of a note receivable in March, $48,000 on the sale of the 3400 Carlisle Office Building in April, $2.3 million on the sale of Hampton Court Office Building in May, $1.0 million on the sale of Pierce Tower Apartments and $2.2 million on the sale of Northgate Industrial Warehouse in June 1999 and $917,000 on the sale of Shadowridge Apartments in September. In the three and nine months ended September 30, 1998, gains on the sale of real estate totaling $454,000 and $5.9 million were realized, $5.6 million on the sale of the Edgewood Apartments in January, and $454,000 on the sale of Rio Pinar Shopping Center in September and a loss of $153,000 on the sale of the Pinemont Professional Building in May. 17 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 1998 Form 10-K, the Trust has elected and in the opinion of 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 apartment operations tend to 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, the cost of new borrowings, as well as the cost of variable interest rate debt, 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. Year 2000 - --------- BCM, the Trust's advisor, has informed management that its computer hardware operating system and computer software have been certified as year 2000 compliant. Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM that performs property management services for the Trust's properties, has informed management that effective January 1, 1999, it 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS (Continued) --------------------- Year 2000 (Continued) - --------- began using year 2000 compliant computer hardware and property management software for the Trust's commercial properties. With regards to the Trust's apartments, Carmel, Ltd. has informed management that its subcontractors are also using year 2000 compliant computer hardware and property management software. The Trust has not incurred, nor does it expect to incur, any costs related to its computer hardware and accounting and property management software being modified, upgraded or replaced in order to make it year 2000 compliant. Such costs have been or will be borne by either BCM, Carmel, Ltd. or the property management subcontractors of Carmel, Ltd. Management has completed its evaluation of the Trust's computer controlled building systems, such as security, elevators, heating and cooling, etc., to determine what systems are not year 2000 compliant. Management believes that necessary modifications are insignificant to such systems and will not require significant expenditures, as such enhanced operating systems are readily available. The Trust has or will have in place the year 2000 compliant systems that will allow it to operate. The risks the Trust faces are that certain of its vendors will not be able to supply goods or services and that financial institutions and taxing authorities will not be able to accurately apply payments made to them. Management believes that other vendors are readily available and that financial institutions and taxing authorities will, if necessary, apply monies received manually. The likelihood of the above having a significant impact on the Trust's operations is negligible. ------------------------- PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS The Trust held a special meeting of shareholders on September 28, 1999, at which meeting the Trust's shareholders were asked to consider and vote upon the proposed incorporation of the trust and the merger with Transcontinental Realty Investors, Inc. ("TCI"). At such meeting, the Trust's shareholders approved the incorporation and merger proposal with 3,135,549 votes for the proposal, 34,333 votes against the proposal and 32,528 votes abstaining. ITEM 5. OTHER INFORMATION - -------------------------- Proposed Merger with Transcontinental Realty Investors, Inc. - ------------------------------------------------------------ On September 28, 1999, the Trust's shareholders approved a proposal for the Trust to be acquired by TCI. Under the proposal, TCI will acquire all of the Trust's outstanding shares of beneficial interest, in a tax free exchange, for shares of TCI's common stock. TCI will issue 1.181 shares of its common stock for each outstanding share of beneficial interest of the Trust. Upon the exchange of shares the Trust will merge with and into TCI. The share exchange and merger are expected to be completed in the first quarter of 2000. TCI has the same Board and advisor as the Trust. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits: Exhibit Number Description - ------- ----------------------------------------------------- 27.0 Financial Data Schedule (b) Reports on Form 8-K as follows: None. 20 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: December 8, 1999 By: /s/ Karl L. Blaha ------------------------- ----------------------------------- Karl L. Blaha President Date: December 8, 1999 By: /s/ Thomas A. Holland ------------------------- ----------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 21 CONTINENTAL MORTGAGE AND EQUITY TRUST EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Nine Months Ended September 30, 1999 Exhibit Page Number Description Number - ------- --------------------------------------------------- ------ 27.0 Financial Data Schedule. 22 -----END PRIVACY-ENHANCED MESSAGE-----