-----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, BQ/JCsDqcgDnxVK5gcO+4NJnT2p323/rh0z7RMQtgm8OKfPlfe4r947UCHOq06k+ bWXPpXx2w65w09P100GaaQ== 0000950134-98-004345.txt : 19980515 0000950134-98-004345.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950134-98-004345 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD 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 SEC ACT: SEC FILE NUMBER: 000-10503 FILM NUMBER: 98620657 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 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1998 ---------------- 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 4,006,470 - ------------------------------ ------------------------------- (Class) (Outstanding at April 30, 1998) 1 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but in the opinion of the management of Continental Mortgage and Equity Trust (the "Trust"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position and consolidated cash flows at the dates and for the periods indicated, have been included. CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1998 1997 ------------ ------------ (dollars in thousands) Assets Notes and interest receivable Performing ...................................................... $ 2,836 $ 2,853 Nonperforming and/or nonaccruing ................................ 2,257 2,257 ------------ ------------ 5,093 5,110 Less - allowance for estimated losses .............................. (1,481) (1,481) ------------ ------------ 3,612 3,629 Foreclosed real estate held for sale, net of accumulated depreciation ($725 in 1998 and 1997) ........................................................... 5,670 5,670 Real estate under contract for sale, net of accumulated depreciation ($3,024 in 1997) ....................... -- 5,940 Real estate held for investment, net of accumulated depreciation ($20,660 in 1998 and $19,393 in 1997) .............. 275,823 250,084 Investment in marketable equity securities of affiliate, at market ............................................ 13,631 13,042 Cash and cash equivalents .......................................... 7,184 3,088 Other assets (including $351 in 1998 and $791 in 1997 from affiliates) ........................................... 15,323 17,917 ------------ ------------ $ 321,243 $ 299,370 ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED BALANCE SHEETS - Continued
March 31, December 31, 1998 1997 ------------ ------------ (dollars in thousands) Liabilities and Shareholders' Equity Liabilities Notes and interest payable ..................................................... $ 221,527 $ 199,712 Other liabilities (including $291 in 1998 and $2,381 in 1997 to affiliates) ............................................... 8,338 11,615 ------------ ------------ 229,865 211,327 Commitments and contingencies Shareholders' equity Shares of Beneficial Interest, no par value; authorized shares, unlimited; issued and outstanding, 4,006,470 shares in 1998 and 4,021,470 shares in 1997 .............................................................. 8,024 8,054 Paid-in capital ................................................................ 256,891 257,101 Accumulated distributions in excess of accumulated earnings .................................................................... (185,863) (188,849) Net unrealized gains on marketable equity securities .................................................................. 12,326 11,737 ------------ ------------ 91,378 88,043 ------------ ------------ $ 321,243 $ 299,370 ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 4 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1998 1997 ------------- ------------- (dollars in thousands, except per share) Revenues Rents ............................................... $ 14,810 $ 13,069 Interest ............................................ 231 272 ------------- ------------- 15,041 13,341 Expenses Property operations ................................. 8,477 7,705 Interest ............................................ 5,084 3,532 Depreciation ........................................ 2,085 1,520 Advisory fee to affiliate ........................... 564 444 Net income fee to affiliate ......................... 291 -- General and administrative .......................... 604 585 ------------- ------------- 17,105 13,786 ------------- ------------- (Loss) from operations ................................. (2,064) (445) Equity in income of partnerships ....................... 35 47 Gain on sale of real estate ............................ 5,616 -- ------------- ------------- Net income (loss) ...................................... $ 3,587 $ (398) ============= ============= Earnings per share Net income (loss) ...................................... $ .89 $ (.10) ============= ============= Weighted average shares of beneficial interest used in computing earnings per share ................ 4,013,236 4,026,197 ============= =============
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 5 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, 1998 ...................... 4,021,470 $ 8,054 $ 257,101 $ (188,849) $ 11,737 $ 88,043 Comprehensive Income Net income ................ -- -- -- 3,587 -- 3,587 Unrealized gains on marketable equity securities ............. -- -- -- -- 589 589 ---------- 4,176 Repurchase of shares of beneficial interest ....... (15,000) (30) (210) -- -- (240) Distributions ($.15 per share) ................ -- -- -- (601) -- (601) ---------- ---------- ---------- ---------- ---------- ---------- Balance, March 31, 1998 ...................... 4,006,470 $ 8,024 $ 256,891 $ (185,863) $ 12,326 $ 91,378 ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 6 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, -------------------------- 1998 1997 ---------- ---------- (dollars in thousands) Cash Flows from Operating Activities Rents collected .............................................. $ 14,782 $ 13,000 Interest collected ........................................... 69 439 Interest paid ................................................ (4,548) (3,359) Payments for property operations ............................. (11,775) (6,9380 General and administrative expenses paid ..................... (588) (1,032) Advisory, net income and incentive sales fees paid to affiliate ......................................... (675) (1,033) Distributions from partnerships' operating cash flow ...................................................... 21 124 Other ........................................................ 132 (62) ---------- ---------- Net cash (used in) provided by operating activities ............................................ (2,582) 1,139 Cash Flows from Investing Activities Acquisitions of real estate .................................. (25,653) (13,998) Real estate improvements ..................................... (745) (5840 Deposits on pending acquisitions ............................. (495) (2400 Proceeds from sale of real estate ............................ 14,004 -- Collections on notes receivable .............................. 26 115 ---------- ---------- Net cash (used in) investing activities ................... (12,863) (14,707) Cash Flows from Financing Activities Proceeds from notes payable .................................. 47,912 13,093 Payments on notes payable .................................... (26,115) (825) Deferred financing costs ..................................... (1,415) (374) Distributions to shareholders ................................ (601) (523) Repurchase of shares of beneficial interest .................. (240) -- ---------- ---------- Net cash provided by financing activities ................. 19,541 11,371 ---------- ---------- Net increase (decrease) in cash and cash equivalents .................................................. 4,096 (2,197) Cash and cash equivalents, beginning of period .................. 3,088 2,961 ---------- ---------- Cash and cash equivalents, end of period ........................ $ 7,184 $ 764 ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 7 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Three Months Ended March 31, -------------------------- 1998 1997 ---------- ---------- (dollars in thousands) Reconciliation of net income (loss) to net cash provided by (used in) operating activities Net income (loss) ............................................... $ 3,587 $ (398) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Gain on sale of real estate .................................. (5,616) -- Depreciation ................................................. 2,085 1,520 Equity in (income) of partnerships ........................... (35) (47) (Increase) decrease in interest receivable ................... (9) 192 Decrease in other assets ..................................... 587 265 Increase (decrease) in other liabilities ..................... (3,219) 871 Increase in interest payable ................................. 17 23 Distributions from partnerships' operating cash flow ...................................................... 21 124 ---------- ---------- Net cash (used in) provided by operating activities ................................................ $ (2,582) $ 2,550 ========== ========== Noncash investing and financing activities Notes payable from acquisition of real estate ................ $ -- $ 2,700 Unrealized gain on marketable equity securities .............. 589 8,505
The accompanying notes are an integral part of these Consolidated Financial Statements. 7 8 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997 ("1997 Form 10-K"). Certain balances for 1997 have been reclassified to conform to the 1998 presentation. NOTE 2. MORTGAGE NOTES RECEIVABLE As more fully discussed in NOTE 4. "NOTES PAYABLE," seven of the Trust's mortgage notes receivable, with a combined principal balance of $1.4 million at December 31, 1997, were pledged as additional collateral on a $2.3 million loan, primarily secured by the AMOCO Office Building in New Orleans, Louisiana. In March 1998, the note payable secured by the AMOCO Office Building was refinanced and the collateral notes were released. NOTE 3. REAL ESTATE In January 1998, the Trust completed the sale of the Edgewood Apartments, a 353 unit apartment complex in Lansing, Illinois, that was under contract for sale at December 31, 1997. The apartment complex was sold for $12.1 million in cash, with the Trust receiving net cash of $2.3 million after the payoff of $9.3 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Trust paid a real estate brokerage commission of $302,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Trust's advisor, based on the $12.1 million sales price of the property. The Trust recognized a gain of $5.6 million on the sale. Also in January 1998, the Trust purchased the McKinney 36 land, 36.4 acres of undeveloped land in Collin County, Texas, for $2.1 million in cash. The Trust paid a real estate brokerage commission of $82,000 to Carmel Realty and a property acquisition fee of $21,000 to BCM based on the $2.1 million purchase price of the property. In March 1998, the Trust purchased 1010 Common Street, a 494,579 square foot office building in New Orleans, Louisiana, for $14.5 million. The building was acquired subject to ground leases that expire from November 8 9 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3. REAL ESTATE (Continued) 2029 to April 2069. The Trust paid $6.3 million in cash and obtained new mortgage financing of $8.2 million. The lender has committed to fund an additional $3.8 million for tenant improvements. The mortgage bears interest at 9.7% per annum, requires monthly payments of interest only and matures in March 2001. The Trust paid a real estate brokerage commission of $337,500 to Carmel Realty and a property acquisition fee of $145,000 to BCM based on the $14.5 million purchase price of the property. In April 1998, the Trust purchased four of the ground leases for $200,000 in cash. Also in March 1998, the Trust purchased 225 Baronne Street, a 416,834 square foot office building in New Orleans, Louisiana, for $11.2 million. The Trust paid $3.8 million in cash and obtained new mortgage financing of $7.4 million. The lender has committed to fund an additional $1.6 million for tenant improvements. The mortgage bears interest at 9.7% per annum, requires monthly payments of interest only and matures in March 2001. The Trust paid a real estate brokerage commission of $288,000 to Carmel Realty and a property acquisition fee of $112,000 to BCM based on the $11.2 million purchase price of the property. Further in March 1998, the Trust sold 4050 Getwell, a 112,382 square foot industrial warehouse in Memphis, Tennessee, for $2.1 million in cash. The Trust received net cash of $1.2 million after the payoff of $793,000 in existing mortgage debt and the payment of various closing costs associated with the sale. The Trust paid a real estate brokerage commission of $81,500 to Carmel Realty based on the $2.1 million sales price of the property. The Trust recognized no gain or loss on the sale. NOTE 4. NOTES PAYABLE In January 1998, the Trust refinanced the mortgage debt secured by the Promenade Shopping Center in Highlands Ranch, Colorado in the amount of $7.7 million. The Trust received net cash of $2.1 million after the payoff of $5.4 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the financing. The new mortgage bears interest at 7.42% per annum, requires monthly payments of principal and interest of $56,502 and matures in January 2008. The Trust paid a mortgage brokerage and equity refinancing fee of $77,000 to BCM based on the new $7.7 million mortgage. In March 1998, the Trust refinanced the mortgage debt secured by the AMOCO Office Building in New Orleans, Louisiana, and by seven mortgage notes receivable in the amount of $15.0 million. The Trust received net cash of $11.9 million after the payoff of $3.8 million in existing mortgage debt and the payment of various closing costs associated with the financing. The lender has committed to fund an additional $1.0 million in tenant improvements. The new mortgage bears interest at 8.7% 9 10 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4. NOTES PAYABLE (Continued) per annum, requires monthly payments of interest only and matures in March 2001. The Trust paid BCM a mortgage brokerage and equity refinancing fee of $160,000 based on the new $16.0 million mortgage. The mortgage debt secured by the AMOCO, 1010 Common Street and 225 Baronne Street Office Buildings in New Orleans, Louisiana are cross-collateralized and cross defaulted. Both the Trust and BCM have guaranteed the debt. Also the Trust has committed to borrow an additional $163.0 million during the next twenty-four months from the lender. In exchange for this commitment, the lender may record a second lien mortgage on the New Orleans properties of up to $2.0 million. $1.0 million of this lien will be released upon the lender funding an additional $63.0 million in new loans to the Trust or BCM affiliated entities, with the remaining $1.0 million released pro rata as the remaining $100.0 million in new loans is funded. At March 31, 1998, $163.0 million of the borrowing commitment remained to be satisfied. Also in March 1998, the Trust refinanced the mortgage debt secured by the McCallum Crossing Apartments in Dallas, Texas in the amount of $8.4 million. The Trust received net cash of $1.8 million after the payoff of $6.3 million in existing mortgage debt and the payment of various closing costs associated with the financing. The new mortgage bears interest at 7.19% per annum, requires monthly payments of principal and interest of $56,961 and matures in April 2008. The Trust paid a mortgage brokerage and equity refinancing fee of $84,000 to BCM based on the new $8.4 million mortgage. NOTE 5. 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 6. SUBSEQUENT EVENTS In April 1998, the Trust purchased Fontenelle Hills, a 338 unit apartment complex in Bellevue, Nebraska, for $12.8 million. The Trust paid $2.0 million in cash and obtained new mortgage financing of $10.8 million. The mortgage bears interest at 7.16% per annum, requires monthly payments of principal and interest of $73,017 and matures in April 2008. The Trust paid a real estate brokerage commission of $311,000 to Carmel Realty and a property acquisition fee of $128,000 to BCM based on the $12.8 million purchase price of the property. Also in April 1998, the Trust obtained mortgage financing secured by the previously unencumbered McKinney 36 land in McKinney, Texas in the amount of $2.1 million. The Trust received net cash of $2.0 million after the payment of various closing costs associated with the 10 11 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 6. SUBSEQUENT EVENTS (Continued) financing. The new mortgage bears interest at 9.25% per annum, requires monthly payments of interest only and matures in April 2000. The Trust paid a mortgage brokerage and equity refinancing fee of $21,000 to BCM based on the $2.1 million mortgage. Further in April 1998, the Trust sold five mortgage loans secured by single-family residences located in Arizona and Hawaii for $319,000 in cash. The Trust received net cash of $304,000 after the payment of various closing costs. The Trust recognized no gain or loss on the sale. ------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Continental Mortgage and Equity Trust (the "Trust") was formed to invest in real estate through acquisitions, leases and partnerships and in mortgage loans on real estate, including first, wraparound and junior mortgage loans. The Trust was organized on August 27, 1980 and commenced operations on December 3, 1980. Liquidity and Capital Resources Cash and cash equivalents aggregated $7.2 million at March 31, 1998, compared with $3.1 million at December 31, 1997. 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, principal payments on mortgage notes receivable and borrowings. The Trust expects that net cash provided by operating activities and from anticipated external sources, such as property sales, financings and refinancings, will be sufficient to meet the Trust's various cash needs, including, but not limited to, debt service obligations, shareholder distributions and property maintenance and improvements. The Trust's cash flow from property operations (rents collected less payments for expenses applicable to rental income) decreased from $6.1 million in the first quarter of 1997 to $3.0 million in the first quarter of 1998. Of this net decrease, $2.7 million is due to increased property taxes and $943,000 is due to the sale of four commercial properties in 1997 and an apartment complex in 1998. The decreases are partially offset by an increase of $950,000 due to the acquisition of eight additional income producing properties subsequent to March 31, 1997. The Trust's 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) management believes that the Trust's cash flow from property operations will increase as the Trust benefits from the properties acquired in the last nine months of 1997 and first three months of 1998. In January 1998, the Trust refinanced the mortgage debt secured by the Promenade Shopping Center in Highlands Ranch, Colorado in the amount of $7.7 million. The Trust received net cash of $2.1 million after the payoff of $5.4 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the financing. Also in January 1998, the Trust purchased the McKinney 36 land, 36.4 acres of undeveloped land in Collin County, Texas, for $2.1 million. In March 1998, the Trust purchased 1010 Common Street, a 494,579 square foot office building in New Orleans, Louisiana, for $14.5 million. The Trust paid $6.3 million in cash and obtained new mortgage financing of $8.2 million. Also in March 1998, the Trust purchased 225 Baronne Street, a 416,834 square foot office building in New Orleans, Louisiana, for $11.2 million. The Trust paid $3.8 million in cash and obtained new mortgage financing of $7.4 million. Further in March 1998, the Trust sold 4050 Getwell, a 112,382 square foot industrial warehouse in Memphis, Tennessee, for $2.1 million in cash. The Trust received net cash of $1.2 million after the payoff of $793,000 in existing mortgage debt and the payment of various closing costs associated with the sale. The Trust derived the cash portions of these acquisitions from its cash on hand at December 31, 1997 and from the sale of 4050 Getwell and the refinancing the AMOCO Office Building discussed below. In March 1998, the Trust refinanced the mortgage debt secured by the AMOCO Office Building in New Orleans, Louisiana, and by seven mortgage notes receivable in the amount of $15.0 million. The Trust received net cash of $11.9 million after the payoff of $3.8 million in existing mortgage debt and the payment of various closing costs associated with the financing. The mortgage debt secured by the above three New Orleans properties is cross-collateralized and cross defaulted. Both the Trust and Basic Capital Management, Inc. ("BCM"), the Trust's advisor, have guaranteed the debt. The Trust has committed to borrow an additional $163.0 million from the lender during the next twenty-four months. In exchange for this commitment, the lender may record a second lien mortgage on the New Orleans properties of up to $2.0 million. $1.0 million of this lien will be released upon the lender funding an additional $63.0 million in new loans to the Trust or BCM affiliated entities, with the remaining $1.0 million released pro rata as the remaining $100.0 million in new loans is funded. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) Also in March 1998, the Trust refinanced the mortgage debt secured by the McCallum Crossing Apartments in Dallas, Texas, in the amount of $8.4 million. The Trust received net cash of $1.8 million after the payoff of $6.3 million in existing mortgage debt and the payment of various closing costs associated with the financing. In December 1989, the Trust's Board of Trustees authorized the Trust to repurchase a total of 1,465,000 of its shares of beneficial interest. The Trust completed the authorized repurchase during the first quarter of 1998. The Trust repurchased such shares at a total cost to the Trust of $7.8 million. In April 1998, the Trust's Board of Trustees authorized the Trust to repurchase an additional 200,000 of its shares of beneficial interest. In February 1998, the Trust's Board of Trustees declared the Trust's quarterly distribution of $.15 per share. The distribution was paid on March 31, 1998, totaling $601,000, to shareholders of record on March 13, 1998. The Trust's management reviews the carrying value of the Trust's mortgage notes receivable and properties 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. In those instances where impairment is found to exist, a provision for loss is recorded by a charge against earnings. The Trust's 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 For the three months ended March 31, 1998, the Trust had net income of $3.6 million, which includes a gain on sale of real estate of $5.6 million, compared to a net loss of $398,000 for the three months ended March 31, 1997, which contained no such gains. Fluctuations in these and other components of the Trust's revenues and expenses between the 1997 and 1998 periods are discussed below. Rents increased from $13.1 million for the three months ended March 31, 1997 to $14.8 million for the three months ended March 31, 1998. Of this increase, $2.4 million is attributable to the acquisition of three apartment complexes and five commercial properties subsequent to March 31, 1997. The remainder of the increase is due to increased rental and 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) occupancy rates at the Trust's apartment complexes and commercial properties. These increases are partially offset by a decrease of $1.9 million due to the sale of four commercial properties in 1997 and an apartment complex in 1998. Interest income was $272,000 for the three months ended March 31, 1997 compared to $231,000 for the three months ended March 31, 1998. The decrease is due to the payoff of five mortgage notes receivable in 1997, partially offset by an increase in short-term investment income. Interest income in the remaining quarters of 1998 is expected to approximate that of the first quarter. Property operating expenses increased from $7.7 million for the three months ended March 31, 1997 to $8.5 million for the three months ended March 31, 1998. Of this increase, $1.4 million is due to the acquisition of three apartment complexes and five commercial properties subsequent to March 31, 1997. These increases are partially offset by a decrease of $914,000 due to the sale of four commercial properties in 1997 and an apartment complex in 1998. Interest expense increased from $3.5 million for the three months ended March 31, 1997 to $5.1 million for the three months ended March 31, 1998. Of this increase, $1.4 million is due to interest expense recorded on mortgages secured by eleven properties, encumbered by debt, acquired in 1997 and two properties acquired in 1998. An additional $542,000 is due to interest expense recorded on borrowings in 1997 and 1998, secured by mortgages on five previously unencumbered apartment complexes and four previously unencumbered commercial properties and a parcel of undeveloped land and the refinancing of six existing mortgages in 1997 and two existing mortgages in 1998 where the loan balance was increased. These increases are partially offset by a decrease of $332,000 due to the sale of four commercial properties encumbered by debt in 1997 and an apartment complex in 1998. Interest expense is expected to increase in the remaining quarters of 1998, as a result of a full year of interest expense on properties acquired or refinanced in 1997 and in the first quarter of 1998. Depreciation expense increased from $1.5 million for the three months ended March 31, 1997 to $2.1 million for the three months ended March 31, 1998. This increase is due to the acquisition of three apartment complexes and five commercial properties subsequent to March 31, 1997. Depreciation is expected to increase during the remaining quarters of 1998, as a result of a full year of depreciation on the properties acquired in 1997 and in the first quarter of 1998. Advisory fee to affiliate increased from $444,000 for the three months ended March 31, 1997 to $564,000 for the three months ended March 31, 1998. This increase is due to an increase in the Trust's gross assets, the basis for the advisory fee, as a result property acquisitions in 1997 and in 1998. The advisory fee is expected to continue to increase as the Trust makes additional property acquisitions. 14 15 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, 1998, the Trust recorded a net income fee of $291,000, as a result of the gain on the sale of the Edgewood Apartments of $5.6 million as discussed below. No such fee was recorded by the Trust in 1997. General and administrative expenses of $585,000 for the three months ended March 31, 1997 approximated the $604,000 for the three months ended March 31, 1998. The Trust's equity in earnings of partnerships was $47,000 for the three months ended March 31, 1997 as compared to $35,000 for the three months ended March 31, 1998. The decrease is due primarily to the acquisition by the Trust in October 1997 of the remaining 40% interest in the Indcon Partnership. For the three months ended March 31, 1998, the Trust recognized a gain on the sale of real estate of $5.6 million on the sale of Edgewood Apartments in January 1998. No gains on sale of real estate were recognized in 1997. Tax Matters As more fully discussed in the Trust's 1997 Form 10-K, the Trust has elected and in the opinion of the Trust's management, qualified to be taxed as a Real Estate Investment Trust ("REIT") as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, (the "Code"). To continue to qualify for federal taxation as a REIT under the Code, the Trust is required to hold at least 75% of the value of its total assets in real estate assets, government securities and cash and cash equivalents at the close of each quarter of each taxable year. The Code also requires a REIT to distribute at least 95% of its REIT taxable income plus 95% of its net income from foreclosure property, as defined in Section 857 of the Code, on an annual basis to shareholders. Inflation The effects of inflation on the Trust's operations are not quantifiable. Revenues from property operations fluctuate proportionately with increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and, correspondingly, the ultimate gains to be realized by the Trust from property sales. To the extent that inflation affects interest rates, the Trust's earnings from short-term investments and the cost of new borrowings as well as its existing variable rate borrowings will be affected. Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, the Trust may be potentially liable for removal or 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Environmental Matters (Continued) 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 advised the Trust that its current computer software has been certified by the Information Technology Association of America ("ITAA") as year 2000 compliant. The Trust's Advisor has also advised the Trust that it has recently received and plans to install in 1998 the ITAA certified year 2000 compliant operating system for its computer hardware. --------------------------------- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Olive Litigation. In February 1990, the Trust, together with Income Opportunity Realty Investors, Inc. ("IORI"), National Income Realty Trust and Transcontinental Realty Investors, Inc. ("TCI"), three real estate entities with, at the time, the same officers, directors or trustees and advisor as the Trust, entered into a settlement of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al. pending before the United States District Court for the Northern District of California and relating to the operation and management of each of the entities. On April 23, 1990, the court granted final approval of the terms of a settlement. On May 4, 1994, the parties entered into a Modification of Stipulation of Settlement dated April 27, 1994 (the "Olive Modification") that settled subsequent claims of breaches of the settlement that were asserted by the plaintiffs and modified certain provisions of the April 1990 settlement. The Olive Modification was preliminarily approved by the Court on July 1, 1994, and final Court approval was entered on December 12, 1994. The effective date of the Olive Modification was January 11, 1995. 16 17 ITEM 1. LEGAL PROCEEDINGS (Continued) The Court retained jurisdiction to enforce the Olive Modification, and during August and September 1996, the Court held evidentiary hearings to assess compliance with the terms of the Olive Modification by various parties. The Court issued no ruling or order with respect to the matters addressed at the hearings. Separately, in 1996, legal counsel for the plaintiffs notified the Trust's Board of Trustees that he intended to assert that certain actions taken by the Board of Trustees breached the terms of the Olive Modification. On January 27, 1997, the parties entered into an Amendment to the Olive Modification, effective January 9, 1997 (the "Olive Amendment"), which was submitted to the Court for approval on January 29, 1997. The Olive Amendment provides for the settlement of all matters raised at the evidentiary hearings and by plaintiffs' counsel in his notices to the Trust's Board of Trustees. On May 2, 1997, a hearing was held for the Court to consider approval of the Olive Amendment. As a result of the hearing the parties entered into a revised Olive Amendment. The Court issued an order approving the Olive Amendment on July 3, 1997. The Olive Amendment provides for the addition of four new unaffiliated members to the Trust's Board of Trustees and sets forth new requirements for the approval of any transactions with certain affiliates until April 28, 1999. In addition, the Trust, IORI, TCI and their shareholders released the defendants from any claims relating to the plaintiffs' allegations and matters which were the subject of the evidentiary hearings. The plaintiffs' allegations of any breaches of the Olive Modification shall be settled by mutual agreement of the parties or, lacking such agreement, by an arbitration proceeding. Under the Olive Amendment, all shares of the Trust owned by Gene E. Phillips or any of his affiliates shall be voted at all shareholder meetings of the Trust held until April 28, 1999 in favor of all new members of the Board of Trustees added under the Olive Amendment. The Olive Amendment also requires that, until April 28, 1999, all shares of the Trust owned by Mr. Phillips or his affiliates in excess of forty percent (40%) of the Trust's outstanding shares shall be voted in proportion to the votes cast by all non-affiliated shareholders of the Trust. In accordance with the Olive Amendment, Richard W. Douglas, Larry E. Harley and R. Douglas Leonhard were added to the Trust's Board of Trustees in January 1998 and Murray Shaw was added to the Trust's Board of Trustees in February 1998. ITEM 5. OTHER INFORMATION On October 25, 1996, the Trust's Board of Trustees approved a proposal to convert the Trust from a California business trust into a Nevada corporation. On February 10, 1998, the incorporation proposal was considered by the Trust's current Board of Trustees and was unanimously approved by such Board members. The Trust's Board of Trustees believes 17 18 ITEM 5. OTHER INFORMATION (Continued) that the change from a California business trust to a Nevada corporation will afford the Trust greater legal certainty in matters of corporate governance and indemnification and therefore greater predictability in the conduct of its business as a corporation under Nevada law. The Trust's management is evaluating the various alternative methods to accomplish this conversion. 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. 18 19 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONTINENTAL MORTGAGE AND EQUITY TRUST Date: May 14, 1998 By: /s/ Randall M. Paulson ---------------- ------------------------------------------ Randall M. Paulson President Date: May 14, 1998 By: /s/ Thomas A. Holland ---------------- ------------------------------------------ Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 19 20 CONTINENTAL MORTGAGE AND EQUITY TRUST EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Three Months Ended March 31, 1998
Exhibit Page Number Description Number - ------- ------------------------------------------- ------ 27.0 Financial Data Schedule. 21
20 EX-27.0 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 7,184 13,631 5,093 1,481 0 0 302,878 21,385 321,243 0 221,527 0 0 0 91,378 321,243 0 14,810 0 8,477 2,085 0 5,084 3,587 0 3,587 0 0 0 3,587 .89 .89
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