-----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, FfZTxC64xQmS//2XXL8N9XgerdG7qgKSYKMgHC6MITY9dPaYC9oI2blyMs2Vukhw mCY+ecoMy9WBK0ne2gq+/A== 0000950134-98-006626.txt : 19980812 0000950134-98-006626.hdr.sgml : 19980812 ACCESSION NUMBER: 0000950134-98-006626 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980811 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: 98681870 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 JUNE 30, 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 JUNE 30, 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 4,012,404 - ------------------------------ ------------------------------ (Class) (Outstanding at July 31, 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
June 30, December 31, 1998 1997 ------------ ------------ (dollars in thousands) Assets Notes and interest receivable Performing ............................................. $ 2,658 $ 2,853 Nonperforming, nonaccruing ............................. 2,257 2,257 ------------ ------------ 4,915 5,110 Less - allowance for estimated losses ..................... (1,456) (1,481) ------------ ------------ 3,459 3,629 Foreclosed real estate held for sale, net of accumulated depreciation ($698 in 1998 and $725 in 1997) ............................................... 4,991 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 ($22,644 in 1998 and $19,393 in 1997) ..... 289,628 250,084 Investment in marketable equity securities of affiliates, at market .................................. 13,597 13,042 Cash and cash equivalents ................................. 5,203 3,088 Other assets (including $214 in 1998 and $791 in 1997 from affiliates) .................................. 16,091 17,917 ------------ ------------ $ 332,969 $ 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
June 30, December 31, 1998 1997 -------------- -------------- (dollars in thousands) Liabilities and Shareholders' Equity Liabilities Notes and interest payable ..................................................... $ 235,189 $ 199,712 Other liabilities (including $2,381 in 1997 to affiliates) ................................................................. 8,129 11,615 -------------- -------------- 243,318 211,327 Commitments and contingencies Shareholders' equity Shares of Beneficial Interest, no par value; authorized shares, unlimited; issued and outstanding, 4,012,404 shares in 1998 and 4,021,470 shares in 1997 .............................................................. 8,036 8,054 Paid-in capital ................................................................ 256,980 257,101 Accumulated distributions in excess of accumulated earnings .................................................................... (187,604) (188,849) Net unrealized gains on marketable equity securities of affiliates .................................................... 12,239 11,737 -------------- -------------- 89,651 88,043 -------------- -------------- $ 332,969 $ 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 For the Six Months Ended June 30, Ended June 30, ------------------------------------ ------------------------------------ 1998 1997 1998 1997 --------------- --------------- --------------- --------------- (dollars in thousands, except per share) Revenues Rents ............................... $ 15,938 $ 13,136 $ 30,748 $ 26,205 Interest ............................ 140 194 371 466 --------------- --------------- --------------- --------------- 16,078 13,330 31,119 26,671 Expenses Property operations ................. 8,957 7,426 17,434 15,131 Interest ............................ 5,073 4,363 10,157 7,895 Depreciation ........................ 1,984 1,457 4,069 2,977 Advisory fee to affiliate ........... 642 560 1,206 1,004 Net income fee to affiliate ......... (93) 386 198 386 General and administrative .......... 535 817 1,139 1,402 --------------- --------------- --------------- --------------- 17,098 15,009 34,203 28,795 --------------- --------------- --------------- --------------- (Loss) from operations ................. (1,020) (1,679) (3,084) (2,124) Equity in income of partnerships ........................ 35 26 70 73 Gains (loss) on sale of real estate .............................. (154) 6,810 5,462 6,810 --------------- --------------- --------------- --------------- Net income (loss) ...................... $ (1,139) $ 5,157 $ 2,448 $ 4,759 =============== =============== =============== =============== Earnings per share Net income (loss) ................... $ (.28) $ 1.28 $ .61 $ 1.18 =============== =============== =============== =============== Weighted average shares of beneficial interest used in computing earnings per share ........ 4,007,538 4,026,002 4,010,342 4,026,099 =============== =============== =============== ===============
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 ............ -- -- -- 2,448 -- 2,448 Unrealized gains on marketable equity securities ......... -- -- -- -- 502 502 ---------- 2,950 Repurchase of shares of beneficial interest ... (15,000) (30) (210) -- -- (240) Shares of beneficial interest sold under dividend reinvestment plan .................. 6,208 12 89 -- -- 101 Fractional shares ........ (274) -- -- -- -- -- Distributions ($.30 per share) ............ -- -- -- (1,203) -- (1,203) ---------- ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1998 .................. 4,012,404 $ 8,036 $ 256,980 $ (187,604) $ 12,239 $ 89,651 ========== ========== ========== ========== ========== ==========
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 Six Months Ended June 30, -------------------------- 1998 1997 ---------- ---------- (dollars in thousands) Cash Flows from Operating Activities Rents collected .................................... $ 30,685 $ 26,207 Interest collected ................................. 266 585 Interest paid ...................................... (9,346) (7,238) Payments for property operations ................... (19,513) (15,365) General and administrative expenses paid ........... (1,529) (1,901) Advisory and net income fee paid to affiliate ...... (1,608) (2,076) Distributions from partnerships' operating cash flow ............................................ 80 210 Other .............................................. (1,280) 524 ---------- ---------- Net cash provided by (used in) operating activities .................................. (2,245) 946 Cash Flows from Investing Activities Acquisition of real estate ......................... (39,975) (10,841) Real estate improvements ........................... (2,486) (2,039) Proceeds from sale of real estate .................. 14,119 12,654 Sale of notes receivable ........................... 304 -- Funding of note receivable ......................... -- (73) Collections on notes receivable .................... 350 851 Deposits on pending acquisitions ................... (175) (4,867) Deferred financing costs ........................... (1,873) (445) ---------- ---------- Net cash (used in) investing activities ......... (29,736) (4,760) Cash Flows from Financing Activities Distributions to shareholders ...................... (1,203) (1,047) Proceeds from notes payable and margin borrowings .. 63,273 20,765 Payments on notes payable .......................... (27,835) (16,026) Repurchase of shares of beneficial interest ........ (240) -- Shares of beneficial interest sold under dividend reinvestment program ................... 101 -- ---------- ---------- Net cash provided by financing activities ....... 34,096 3,692 ---------- ---------- Net increase (decrease) in cash and cash equivalents ........................................ 2,115 (122) Cash and cash equivalents, beginning of period ........ 3,088 2,961 ---------- ---------- Cash and cash equivalents, end of period .............. $ 5,203 $ 2,839 ========== ==========
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 Six Months Ended June 30, -------------------------- 1998 1997 ---------- ---------- (dollars in thousands) Reconciliation of net income to net cash provided by operating activities Net income ................................................. $ 2,448 $ 4,759 Adjustments to reconcile net income to net cash provided by operating activities Depreciation ............................................ 4,069 2,977 Gain on sale of real estate ............................. (5,462) (6,810) Distributions from partnerships' operating cash flow ................................................. 80 210 Equity in (income) of partnerships ...................... (70) (73) (Increase) decrease in interest receivable .............. (70) 213 Decrease in other assets ................................ 979 1,296 (Decrease) in other liabilities ......................... (4,257) (1,677) Increase in interest payable ............................ 38 51 ---------- ---------- Net cash provided by (used in) operating activities ....................................... $ (2,245) $ 946 ========== ========== Noncash investing and financing activities Notes payable from acquisition of real estate ........... $ -- $ 8,056 Unrealized gain on marketable equity securities ......... 502 5,236 Note receivable from sale of real estate ................ 467 --
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 six month period ended June 30, 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. 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 associated with the sale. The Trust recognized no gain or loss on the sale. 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 8 9 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3. REAL ESTATE (Continued) 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 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. 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 purchased the Whisenant land, 16.802 acres of undeveloped land in Collin County, Texas, for $600,000 in cash. The Trust paid a real estate brokerage commission of $24,000 to Carmel Realty and an acquisition fee of $6,000 to BCM based on the $600,000 purchase price of the property. 9 10 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3. REAL ESTATE (Continued) In May 1998, the Trust sold the Pinemont Professional Building, a 19,685 square foot office building in Houston, Texas, for $570,000. the Trust received $57,000 in cash and provided $467,000 of seller financing in the form of a wraparound mortgage note. The note bears interest at 10.4% per annum, requires monthly payments of principal and interest of $6,281 and matures in July 2008. The Trust recognized a loss of $154,000 on the sale. The Trust has begun rebuilding an industrial warehouse in Atlanta, Georgia that was destroyed by fire in 1996. The Trust has expended to date $309,000 and expects to expend an additional $196,000 prior to the building's completion during the third quarter of 1998. 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 required 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 in the amount of $15.0 million secured by the AMOCO Office Building in New Orleans, Louisiana, and by seven mortgage notes receivable. 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% 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 repayment of the debt. Also, the Trust has committed to borrow an additional $163.0 million during the period ending March 2000 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 June 30, 1998, $156.2 million of the borrowing commitment remained to be satisfied. 10 11 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4. NOTES PAYABLE (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. 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. In April 1998, the Trust obtained mortgage financing secured by the previously unencumbered McKinney 36 land in Collin County, 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 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. In May 1998, the Trust refinanced the mortgage debt secured by the Willow Wick Apartments in North Augusta, South Carolina in the amount of $2.1 million. The Trust received net cash of $1.1 million after the payoff of $854,000 in existing mortgage debt and the payment of various closing costs associated with the financing. The new mortgage bears interest at 7.205% per annum, requires monthly payments of principal and interest of $13,990 and matures in June 2008. The Trust paid BCM a mortgage brokerage and equity refinancing fee of $21,000 based on the new $2.1 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 July 1998, the Trust purchased the Solco Allen land, 55.725 acres of undeveloped land in Collin County, Texas, for $1.3 million in cash. The Trust paid a real estate brokerage commission of $53,000 to Carmel Realty and an acquisition fee of $13,000 to BCM based on the $1.3 million purchase price of the property. Also in July 1998, the Trust purchased the Sandison land, 100.171 acres of undeveloped land in Collin County, Texas, for $4.7 million in cash. The Trust paid a real estate brokerage commission of $95,000 to Carmel Realty and an acquisition fee of $47,000 to BCM based on the $4.7 million purchase price of the property. 11 12 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 6. SUBSEQUENT EVENTS (Continued) In conjunction with these purchases, the Trust obtained mortgage financing in the amount of $5.2 million secured by the Solco Allen, Sandison and the unencumbered Whisenant land, all in Collin County, Texas. The new mortgage bears interest at 9.25% per annum, requires monthly payments of interest only and matures in April 2000. ------------------------------------ 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 $5.2 million at June 30, 1998, compared with $3.1 million at December 31, 1997. The principal reasons for the decrease 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) increased from $10.8 million in the first six months of 1997 to $11.2 million in the first six months of 1998. Of this net increase, $2.4 million is the result of the Trust acquiring eight additional income producing properties during 1997 and 1998. This increase is partially offset by the sale of four commercial properties in 1997 and one apartment complex in 1998. The Trust's management believes that the Trust's cash flow from property operations will continue to increase as the Trust continues to benefit from the properties acquired in the last six months of 1997 and first six months of 1998. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 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 the then existing mortgage debt. 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. In April 1998, the Trust obtained mortgage financing secured by such land in the amount of $2.1 million. The Trust received net cash of $2.0 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 consisting of $6.3 million in cash and 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 consisting of $3.8 million in cash and mortgage financing of $7.4 million. In March 1998, the Trust refinanced the mortgage debt in the amount of $15.0 million secured by the AMOCO Office Building in New Orleans, Louisiana, and by seven mortgage notes receivable. The Trust received net cash of $11.9 million after the payoff of the then existing mortgage debt. 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 repayment of the debt. The Trust committed to borrow an additional $163.0 million from the lender during the period ending March 2000, of which $156.2 million of the borrowing commitment at June 30, 1998, remained to be satisfied. 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. Also 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 the then existing mortgage debt. Further 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 the then existing mortgage debt. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In April 1998, the Trust purchased Fontenelle Hills, a 338 unit apartment complex in Bellevue, Nebraska, for $12.8 million, consisting of $2.0 million in cash and mortgage financing of $10.8 million. Also in April 1998, the Trust purchased the Whisenant land, 16.802 acres of undeveloped land in Collin County, Texas, for $600,000 in cash. In May 1998, the Trust refinanced the mortgage debt secured by the Willow Wick Apartments in North Augusta, South Carolina in the amount of $2.1 million. The Trust received net cash of $1.1 million after the payoff of the then existing mortgage debt. In July 1998, the Trust purchased Solco Allen land, 55.725 acres of undeveloped land in Collin County, Texas, for $1.3 million in cash. Also in July 1998, the Trust purchased the Sandison land, 100.171 acres of undeveloped land in Collin County, Texas, for $4.7 million in cash. In conjunction with these purchases, the Trust obtained mortgage financing in the amount of $5.2 million secured by the Solco Allen, Sandison and the unencumbered Whisenant land, all in Collin County, Texas. 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 repurchases 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. No shares have been repurchased under this authorization. In the first six months of 1998, the Trust paid quarterly distributions of $.30 per share or a total of $1.2 million and sold 6,208 shares of beneficial interest through its dividend reinvestment plan for a total of $101,000. 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 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 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 $1.1 million for the three months ended June 30, 1998 and net income of $2.4 million, which includes gains on sale of real estate of $5.5 million, for the six months ended June 30, 1998. The Trust had net income of $5.2 million and $4.8 million for the three and six months ended June 30, 1997, which included gains on sale of real estate totaling $6.8 million. 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 and $26.2 million for the three and six months ended June 30, 1997 to $15.9 million and $30.7 million for the three and six months ended June 30, 1998. Of these increases, $3.0 million and $4.9 million is attributable to the acquisition of three apartment complexes and eight commercial properties subsequent to June 30, 1997. Increases of $1.0 million and $1.9 million are due to increased rental and occupancy rates at the Trust's apartment complexes and commercial properties. These increases are partially offset by decreases of $1.2 million and $2.3 million due to the sale of one apartment complex and three commercial properties subsequent to June 30, 1997. Rents are expected to continue to increase due to revenues from properties acquired subsequent to June 30, 1997. Interest income was $194,000 and $466,000 for the three and six months ended June 30, 1997 compared to $140,000 and $371,000 for the three and six months ended June 30, 1998. The decreases are due to the sale of five mortgage notes receivable in 1998 and 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 second quarter of 1998. Property operating expenses increased from $7.4 million and $15.1 million for the three and six months ended June 30, 1997 to $9.0 million and $17.4 million for the three and six months ended June 30, 1998. Of these increases, $1.7 million and $2.8 million is due to the acquisition of three apartment complexes and eight commercial properties subsequent to June 30, 1997. These increases are partially offset by decreases of $694,000 and $1.2 million due to the sale of one apartment complex in 1998 and three commercial properties subsequent to June 30, 1997. Property operating expenses are expected to continue to increase due to a full year of operations from properties acquired in 1997 and 1998. Interest expense increased from $4.4 million and $7.9 million for the three and six months ended June 30, 1997 to $5.1 million and $10.2 million for the three and six months ended June 30, 1998. Of these 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) increases, $1.3 million and $2.7 million is due to interest expense recorded on mortgages secured by eleven properties, encumbered by debt, acquired in 1997 and three properties, encumbered by debt, acquired in 1998. An additional $149,000 and $668,000 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 in 1997 and a parcel of undeveloped land in 1998 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 decreases of $777,000 and $1.2 million due to the sale of four commercial properties in 1997 and an apartment complex in 1998. Interest expense is expected to increase in the remaining six months of 1998, as a result of a full year of interest expense on properties acquired or refinanced in 1997 and the properties acquired or refinanced in the first six months of 1998. Depreciation expense increased from $1.4 million and $3.0 million for the three and six months ended June 30, 1997 to $2.0 million and $4.1 million for the three and six months ended June 30, 1998. These increases are due to the acquisition of three apartment complexes and eight commercial properties subsequent to June 1997, partially offset by the sales of four commercial properties in 1997 and one apartment complex in 1998. Depreciation is expected to increase during the remaining six months of 1998, as a result of a full year of depreciation on the properties acquired in 1997 and the properties acquired in the first six months of 1998. Advisory fee to affiliate increased from $560,000 and $1.0 million for the three and six months ended June 30, 1997 to $642,000 and $1.2 million for the three and six months ended June 30, 1998. This increase is due to an increase in the Trust's gross assets, the basis for the advisory fee, as a result of property acquisitions in 1997 and in 1998 partially offset by the sale of four commercial properties in 1997 and one apartment complex in 1998. The advisory fee is expected to continue to increase as the Trust makes additional property acquisitions. For the three months ended June 30, 1998, the Trust recorded net income fee refund of $93,000 and for the six months ended June 30, 1998, the Trust recorded a net income fee of $198,000 as a result of the $5.6 million gain on the sale of the Edgewood Apartments, as discussed below. A net income fee of $386,000 was recorded by the Trust for the three and six months ended June 30, 1997 as a result of gains totaling $6.8 million from the sale of two commercial properties, also as discussed below. General and administrative expenses decreased from $817,000 and $1.4 million for the three and six months ended June 30, 1997 to $535,000 and $1.1 million for the three and six months ended June 30, 1998. These decreases are primarily attributable to a decrease in legal fees, partially offset by an increase in Advisor cost reimbursements. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) The Trust's equity in earnings of partnerships was $26,000 and $73,000 for the three and six months ended June 30, 1997 as compared to $35,000 and $70,000 for the three and six months ended June 30, 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 June 30, 1998, the Trust recognized a loss of $154,000 on the sale of Pinemont Professional Building in May 1998. For the six months ended June 30, 1998, the Trust recognized a net gain on the sale of real estate of $5.5 million, $5.6 million of such gain being from the sale of the Edgewood Apartments in January 1998. For the three and six months ended June 30, 1997, the Trust recognized gains on the sale of real estate totaling $6.8 million, $5.4 million on the sale of Tollhill West Office Building in April 1997 and $1.4 million on the sale of 2626 Cole Office Building in May 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 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 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Environmental Matters (Continued) 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 the third quarter of 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., National Income Realty Trust and Transcontinental Realty Investors, Inc., 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 (the "Olive Litigation"). 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 that 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. The Court retained jurisdiction to enforce the Olive Modification, and during August and September 1996, the Court held evidentiary hearings to 18 19 ITEM 1. LEGAL PROCEEDINGS (Continued) 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 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 shareholders' meetings held until April 28, 1999 in favor of all new Board members added under the Olive Amendment. The Olive Amendment also requires that, until April 28, 1999, all shares of the Trust owned by Gene E. Phillips or his affiliates in excess of forty percent (40%) of the Trust's outstanding shares shall be voted pro rata 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 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 19 20 ITEM 5. OTHER INFORMATION (Continued) 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: A Current Report on Form 8-K, dated April 3, 1998, was filed June 25, 1998, with respect to Item 2. "Acquisition or Disposition of Assets," and Item 7. "Financial Statements and Exhibits," which reports the acquisition of the 225 Baronne Street, 1010 Common Street Office Building, Fontenelle Hills Apartments and McKinney 36 land. 20 21 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: August 11, 1998 By: /s/ Randall M. Paulson ------------------- -------------------------------------- Randall M. Paulson President Date: August 11, 1998 By: /s/ Thomas A. Holland ------------------- -------------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 21 22 CONTINENTAL MORTGAGE AND EQUITY TRUST EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Six Months Ended June 30, 1998
Exhibit Page Number Description Number - ------- ----------------------------------- ------ 27.0 Financial Data Schedule. 23
22 EX-27.0 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 5,203 13,597 4,915 1,456 0 0 317,961 23,342 332,969 0 235,189 0 0 0 89,651 332,969 0 30,748 0 17,434 4,069 0 10,157 2,448 0 2,448 0 0 0 2,448 .61 .61
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