-----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, EgbZEQtKcqiyTSzp9qYhKkkTeOz+BkDs/lY/jJIkDDh/q15ZLrexOElfYFzjx9qX t29u2Vjna+P1kSvZd5EvzA== 0000950134-95-002848.txt : 19951119 0000950134-95-002848.hdr.sgml : 19951119 ACCESSION NUMBER: 0000950134-95-002848 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 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: 1934 Act SEC FILE NUMBER: 000-10503 FILM NUMBER: 95590702 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 PERIOD ENDED SEPTEMBER 30, 1995 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 SEPTEMBER 30, 1995 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 2,918,100 - ------------------------------ ---------------------------------- (Class) (Outstanding at November 3, 1995)
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
September 30, December 31, 1995 1994 -------------- -------------- Assets (dollars in thousands) ------ Notes and interest receivable Performing........................................ $ 4,344 $ 4,269 Nonperforming, nonaccruing........................ 4,456 6,946 -------------- -------------- 8,800 11,215 Real estate held for sale, net of accumulated depreciation ($1,704 in 1995 and $1,409 in 1994).. 25,333 24,658 Less - allowance for estimated losses............... (9,207) (9,223) -------------- -------------- 24,926 26,650 Real estate held for investment, net of accumulated depreciation ($14,884 in 1995 and $12,050 in 1994) 150,024 124,706 Investment in marketable equity securities, at market (including $3,997 in 1995 and $3,447 in 1994 of affiliates)............................... 4,824 4,341 Investments in partnerships......................... 12,248 13,805 Cash and cash equivalents........................... 6,954 7,478 Other assets (including $316 in 1995 and $604 in 1994 from affiliates)............................. 5,665 5,859 -------------- -------------- $ 204,641 $ 182,839 ============== ============== Liabilities and Shareholders' Equity ------------------------------------ Liabilities Notes and interest payable.......................... $ 121,920 $ 98,252 Other liabilities (including $437 in 1994 to affiliates)....................................... 5,848 5,820 -------------- -------------- 127,768 104,072 Commitments and contingencies Shareholders' equity Shares of Beneficial Interest, no par value; authorized shares, unlimited; issued and out- standing, 2,918,100 shares in 1995 and 2,918,133 shares in 1994.................................... 8,766 8,766 Paid-in capital..................................... 260,060 260,060 Accumulated distributions in excess of accumulated earnings.......................................... (195,053) (192,676) Net unrealized gains on marketable equity securities 3,100 2,617 -------------- -------------- 76,873 78,767 -------------- -------------- $ 204,641 $ 182,839 ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------------------- --------------------------------- 1995 1994 1995 1994 -------------- -------------- --------------- ------------- (dollars in thousands, except per share) Revenue Rentals..................... $ 9,612 $ 7,004 $ 27,318 $ 19,265 Interest.................... 196 726 600 2,173 Equity in income (loss) of partnerships............... 28 (19) 213 (406) -------------- -------------- --------------- ------------- 9,836 7,711 28,131 21,032 Expenses Property operations......... 5,896 4,538 16,456 12,211 Interest.................... 2,481 2,008 6,998 5,534 Depreciation................ 1,103 801 3,133 2,298 Provision for losses........ - - 541 200 Advisory fee to affiliate... 394 330 1,139 976 General and administrative.. 299 214 928 921 -------------- -------------- --------------- ------------- 10,173 7,891 29,195 22,140 -------------- -------------- --------------- ------------- (Loss) before gain on sale of real estate................. (337) (180) (1,064) (1,108) Gain on sale of real estate.. - - - 577 -------------- -------------- --------------- ------------- Net (loss)................... $ (337) $ (180) $ (1,064) $ (531) ============== ============== =============== ============= Earnings per share Net (loss).................. $ (.12) $ (.06) $ (.36) $ ( .18) ============== ============== ============= =========== Weighted average shares of beneficial interest used in computing earnings per share 2,918,104 2,918,167 2,918,114 2,920,376 ============== ============== =============== =============
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 4 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
Accumulated Shares of Distributions Beneficial Interest in Excess of ---------------------------------- Paid-in Accumulated Shares Amount Capital Earnings ------------- ------------- -------------- --------------- (dollars in thousands) Balance, January 1, 1995................ 2,918,133 $ 8,766 $ 260,060 $ (192,676) Fractional shares of beneficial interest acquired............ (33) - - - Distributions ($.45 per share).......... - - - (1,313) Unrealized gains on marketable equity securities.......... - - - - Net (loss)................. - - - (1,064) ------------- ------------- -------------- --------------- Balance, September 30, 1995................ 2,918,100 $ 8,766 $ 260,060 $ (195,053) ============= ============= ============== ===============
Unrealized Gains on Marketable Equity Shareholders' Securities Equity ------------- ------------- Balance, January 1, 1995................ $ 2,617 $ 78,767 Fractional shares of beneficial interest acquired............ - - Distributions ($.45 per share).......... - (1,313) Unrealized gains on marketable equity securities.......... 483 483 Net (loss)................. - (1,064) ------------- ------------- Balance, September 30, 1995................ $ 3,100 $ 76,873 ============= =============
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 5 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, ----------------------------------- 1995 1994 -------------- -------------- (dollars in thousands) Cash Flows from Operating Activities Rents collected.................................. $ 27,306 $ 19,425 Interest collected............................... 527 1,925 Interest paid.................................... (6,359) (4,651) Payments for property operations................. (16,149) (12,164) General and administrative expenses paid......... (1,201) (883) Advisory fee paid to affiliate................... (1,139) (976) Distributions from partnerships' operating cash flow......................................... 745 343 Other........................................ 468 (288) -------------- -------------- Net cash provided by operating activities.... 4,198 2,731 Cash Flows from Investing Activities Acquisition of real estate....................... (6,593) (8,718) Real estate improvements......................... (696) (611) Funding of capital improvement escrow............ (252) - Proceeds from sale of real estate................ - 2,066 Collections on notes receivable.................. 1,059 595 Distributions from partnerships' investing activities................................... - 1,275 -------------- -------------- Net cash (used in) investing activities...... (6,482) (5,393) Cash Flows from Financing Activities Distributions to shareholders.................... (1,313) (1,316) Proceeds from notes payable...................... 4,829 8,438 Payments on notes payable........................ (2,781) (3,342) Distributions from partnerships' financing activities................................... 1,025 - Payments to affiliates, net...................... - (1,079) Repurchase of shares of beneficial interest...... - (84) -------------- -------------- Net cash provided by financing activities.... 1,760 2,617 -------------- -------------- Net (decrease) in cash and cash equivalents....... (524) (45) Cash and cash equivalents, beginning of period.... 7,478 1,771 -------------- -------------- Cash and cash equivalents, end of period.......... $ 6,954 $ 1,726 ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 6 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months Ended September 30, ---------------------------------- 1995 1994 -------------- -------------- (dollars in thousands) Reconciliation of net (loss) to net cash provided by operating activities Net (loss)........................................ $ (1,064) $ (531) Adjustments to reconcile net (loss) to net cash provided by operating activities Depreciation and amortization.................... 3,012 2,391 Provision for losses............................. 541 200 Gain on sale of real estate...................... - (577) Decrease in interest receivable.................. 46 326 (Increase) decrease in other assets.............. 703 (185) Increase (decrease) in other liabilities......... (80) 191 Increase in interest payable..................... 508 167 Distributions from partnerships' operating cash flow......................................... 745 343 Equity in (income) loss of partnerships.......... (213) 406 -------------- -------------- Net cash provided by operating activities.... $ 4,198 $ 2,731 ============== ============== Noncash investing and financing activities Notes payable from acquisition of real estate.... $ 20,790 $ 18,581 Interest on wraparound mortgage loan paid directly to underlying lienholder............ - 641 Unrealized gain (loss) on marketable equity securities................................... 483 (86) Note receivable from sale of real estate......... - 365 Carrying value of real estate acquired through foreclosure (in satisfaction of notes receivable with a carrying value of $891 in 1995 and $10,128 in 1994).................... 891 11,205 Notes payable assumed on foreclosure of collateral securing note receivable.......... - 1,077
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 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, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. 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, 1994 ("1994 Form 10-K"). NOTE 2. INVESTMENTS IN PARTNERSHIPS The Trust's investments in partnerships accounted for using the equity method consisted of the following at September 30, 1995: Sacramento Nine....................... $ (75) Indcon, L.P........................... 12,323 ------------- $ 12,248 =============
The Trust and National Income Realty Trust ("NIRT") are partners in Sacramento Nine ("SAC 9"), the Trust having a 30% interest in the partnership's earnings, losses and distributions. The Trust and NIRT are also partners in Income Special Associates ("ISA"), a joint venture partnership in which the Trust has a 60% interest in earnings, losses and distributions. ISA in turn owns a 100% interest in Indcon, L.P. The partnership agreements require the consent of both the Trust and NIRT for any material changes in the operations of the partnerships' properties, including sales, refinancings and changes in property management. The Trust, as a noncontrolling partner, accounts for its investment in the partnerships using the equity method. In August 1995, SAC 9 obtained mortgage financing secured by an office building in Rancho Cordova, California in the amount of $3.5 million. SAC 9 received net cash of $3.4 million after the payment of various closing costs associated with the financing, of which the Trust's equity share was $1.0 million. The new mortgage bears interest at a variable rate, currently 8.59% per annum, requires monthly payments of principal and interest, currently $31,000, and matures in September 2000. [THIS SPACE INTENTIONALLY LEFT BLANK.] 7 8 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 2. INVESTMENTS IN PARTNERSHIPS (Continued) Set forth below is summarized results of operations for the partnerships the Trust accounts for using the equity method for the nine months ended September 30, 1995: Rents................................... $ 5,810 Depreciation............................ (1,557) Property operations..................... (1,598) Interest expense........................ (2,041) ------------- Net income.............................. $ 614 =============
NOTE 3. MORTGAGE NOTES RECEIVABLE At December 31, 1994, the $1.5 million first mortgage note receivable secured by the Alderwood Apartments in Detroit, Michigan was in default. In April 1995, the borrower offered the Trust $1.0 million in cash in full satisfaction of the debt, which the Trust accepted. A provision for loss of $541,000 was recognized in March 1995 to provide for the loss on the discounted payoff of the mortgage note receivable. The $1.0 million discounted payoff of the note receivable was received on May 9, 1995. In March 1995, the Trust recorded the insubstance foreclosure of the collateral property securing a mortgage note receivable with a principal balance of $891,000. See NOTE 4. "REAL ESTATE." NOTE 4. REAL ESTATE In February 1995, the Trust purchased the Sullyfield Commerce Center, a 243,813 square foot industrial facility in Chantilly, Virginia, for $11.0 million. The Trust paid $2.2 million in cash and the seller provided mortgage financing of $8.8 million. The mortgage bears interest at a rate of 6% per annum through December 1996 and 9% per annum thereafter, requires monthly payments of interest only through January 1999 and principal and interest payments of $73,000 thereafter and matures in January 2001. The Trust paid a real estate brokerage commission of $285,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Trust's advisor, and an acquisition fee of $110,000 to BCM based on the $11.0 million purchase price of the property. In March 1995, the Trust purchased the Kelly Warehouses, six industrial warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for $5.4 million. The Trust paid $444,000 in cash, obtained new mortgage financing of $4.6 million and the seller provided additional financing of $403,000. The $4.6 million mortgage bears interest at a variable rate, currently 9.25% per annum, requires monthly payments of interest only and matures in July 1999. The $403,000 seller financing bears interest at rates ranging from 6% to 8% per annum, requires 8 9 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4. REAL ESTATE (Continued) monthly payments of principal and interest of $3,000 and matures in July 1999. In addition, the Trust funded a $252,000 capital improvement escrow related to the $4.6 million mortgage. The Trust paid a real estate brokerage commission of $178,000 to Carmel Realty and an acquisition fee of $54,000 to BCM based on the $5.4 million purchase price. In March 1995, the Trust recorded the insubstance foreclosure of Driftwood Apartments, a 138 unit apartment complex in Detroit, Michigan. Driftwood Apartments had an estimated fair value (minus estimated costs of sale) at the date of foreclosure, which exceeded the carrying value of the Trust's note receivable. Foreclosure of the property was completed on May 2, 1995. The foreclosure resulted in no loss to the Trust. In May 1995, the Trust purchased the Will-O-Wick Apartments, a 152 unit apartment complex in Pensacola, Florida, for $3.6 million. The Trust paid $687,000, assumed an existing first mortgage of $2.8 million and the seller provided additional financing of $79,000. The $2.8 million first mortgage bears interest at 9.915% per annum, requires monthly payments of principal and interest of $26,000 and matures in April 2001. The $79,000 seller financing bears interest at 9.9% per annum and requires monthly payments of interest only through maturity in May 1997 at which time the entire outstanding principal balance and all accrued and unpaid interest is due. The Trust paid a real estate brokerage commission of $127,000 to Carmel Realty and an acquisition fee of $36,000 to BCM based on the $3.6 million purchase price of the property. In July 1995, the Trust purchased the McCallum Glen Apartments, a 275 unit apartment complex in Dallas, Texas for $6.0 million. The Trust paid $1.8 million and obtained new mortgage financing of $4.2 million. The new first mortgage bears interest at a variable rate, currently 8.6% per annum, requires monthly payments of principal and interest and matures on August 1, 2002. The Trust paid a real estate brokerage commission of $190,000 to Carmel Realty and an acquisition fee of $60,000 to BCM based on the $6.0 million purchase price. NOTE 5. NOTES PAYABLE In February 1995, after determining that further investment in Genesee Towers, an office building in Flint, Michigan, could not be justified without a substantial modification of the mortgage debt, the Trust ceased making debt service payments on the $8.8 million nonrecourse mortgage secured by the property. The Trust is attempting to negotiate with the lender to modify the mortgage. However, there can be no assurance that such negotiations will be successful or that the Trust will continue to own the property. Accordingly, as of December 31, 1994, the carrying value of the property was written down by $1.2 million, which was included in the 1994 provision for losses, to the amount of the nonrecourse mortgage. 9 10 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 5. NOTES PAYABLE (Continued) In May 1995, the Trust obtained new mortgage financing secured by the Sunset Lake Apartments in Waukegan, Illinois in the amount of $5.4 million. The Trust received net cash of $2.2 million after the payoff of $1.9 million in existing mortgage debt that was scheduled to mature in September 1995 and a $1.0 million holdback for property improvements. The remainder of the financing proceeds were used to pay various closing costs associated with the financing. The Trust can borrow an additional $1.6 million under the new loan subject to the satisfaction of certain operating achievements as specified in the note agreement. The new mortgage bears interest at a variable rate, currently 10.5%, requires monthly payments of principal and interest and matures in May 2000. The Trust paid a mortgage brokerage and equity refinancing fee of $54,000 to BCM based upon the new first mortgage financing of $5.4 million. In August 1995, the Trust obtained mortgage financing secured by the previously unencumbered Quail Oaks Apartments in Balch Springs, Texas in the amount of $750,000. The mortgage bears interest at a variable rate, currently 9.75%, requires monthly payments of principal and interest, currently $7,000 and matures in August 2000. The Trust received net cash of $734,000 after the payment of various closing costs associated with the financing. The Trust paid a mortgage brokerage and equity refinancing fee of $7,500 to BCM based upon the first mortgage financing of $750,000. NOTE 6. COMMITMENTS AND CONTINGENCIES The Trust is involved in various lawsuits arising in the ordinary course of business. In the opinion of the Trust's management, the outcome of these lawsuits would have no material impact on the Trust's financial condition or results of operations. ___________________________________ 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 has determined that it will no longer seek to fund or purchase mortgage loans other than those which it may originate in conjunction with providing purchase money financing of a property sale. The Trust was organized on August 27, 1980 and commenced operations on December 3, 1980. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources Cash and cash equivalents aggregated $7.0 million at September 30, 1995, compared with $7.5 million at December 31, 1994. The principal reasons for the reduction 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, collections of mortgage notes receivable and borrowings. The Trust expects that net cash provided by operating activities and from anticipated external sources, such as property sales 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 applicable to rental income) increased from $7.3 million in the nine months of 1994 to $11.2 million in the nine months of 1995. Of this net increase, $4.4 million is the result of the Trust acquiring eight income producing properties subsequent to September 30, 1994 and five additional income producing properties during the first nine months of 1994, which did not contribute to cash flow for the full nine months in 1994. In addition, $900,000 of the increase is due to increases in cash flow from one of the Trust's apartment complexes and two of the Trust's commercial properties due to an increase in occupancy rates and a decrease in operating expenses. The Trust's management believes that the Trust's cash flow from property operations will continue to increase as the Trust benefits from the properties acquired in 1994 and 1995 and as the Trust continues to acquire additional properties. Interest paid on the Trust's notes payable increased from $4.7 million in the first nine months of 1994 to $6.4 million in the first nine months of 1995. This increase is primarily attributable to interest paid on mortgages secured by properties acquired in 1994 and 1995, and interest paid on borrowings in 1994 and 1995 secured by mortgages on previously unencumbered properties. The Trust believes that interest paid on notes payable will continue to increase as the Trust continues to acquire additional properties. In February 1995, the Trust purchased the Sullyfield Commerce Center, a 243,813 square foot industrial facility in Chantilly, Virginia, for $11.0 million. The Trust paid $2.2 million in cash and the seller provided mortgage financing of $8.8 million. In March 1995, the Trust purchased the Kelly Warehouses, six industrial warehouse facilities with a total of 330,334 square feet in Dallas, Texas, for $5.4 million. The Trust paid $444,000 in cash, obtained new mortgage financing of $4.6 million and the seller provided additional financing of $403,000. In addition, the Trust funded a $252,000 capital improvement escrow related to the $4.6 million mortgage. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In May 1995, the Trust received $1.0 million in cash from the discounted payoff of the mortgage note receivable secured by the Alderwood Apartments in Detroit, Michigan. See NOTE 3. "MORTGAGE NOTES RECEIVABLE." Also in May 1995, the Trust obtained new mortgage financing secured by the Sunset Lake Apartments in Waukegan, Illinois in the amount of $5.4 million. The Trust received net cash of $2.2 million after the payoff of $1.9 million in existing mortgage debt that was scheduled to mature in September 1995. The remainder of the financing proceeds were used to fund a $1.0 million escrow for replacements and repairs and to pay various closing costs associated with the financing. In May 1995, the Trust purchased the Will-O-Wick Apartments, a 152 unit apartment complex in Pensacola, Florida, for $3.6 million. The Trust paid $687,000 in cash, assumed an existing first mortgage of $2.8 million and the seller provided additional financing of $79,000. In July 1995, the Trust purchased the McCallum Glen Apartments a 275 unit apartment complex in Dallas, Texas for $6.0 million. The Trust paid $1.8 million in cash and obtained new mortgage financing of $4.2 million. In August 1995, Sacramento Nine ("Sac 9"), a joint venture partnership in which the Trust owns a 60% interest, obtained mortgage financing secured by one of its office buildings in Rancho Cordova, California in the amount of $3.5 million. Sac 9 received net cash of $3.4 million, of which the Trust's equity share was $1.0 million. Also in August 1995, the Trust obtained mortgage financing secured by Quail Oaks Apartments in Balch Springs, Texas in the amount of $750,000. The Trust received net cash of $734,000 after the payment of various closing costs associated with the financing. The Trust's Board of Trustees has authorized the Trust to repurchase a total of 976,667 of its shares of beneficial interest, of which 191,517 shares remain to be purchased as of November 3, 1995. The Trust has not repurchased any of its shares during 1995. In the first nine months of 1995, the Trust paid quarterly distributions of $.45 per share or a total of $1.3 million. On a quarterly basis, the Trust's management reviews the carrying value of the Trust's mortgage notes receivable, properties held for investment and properties held for sale. Generally accepted accounting principles require that the carrying value of such assets cannot exceed the lower of their respective carrying amounts or estimated net realizable value. In an instance where the estimated net realizable value is less than the carrying amount at the time of evaluation, a provision for loss is recorded by a charge against earnings. The estimate of net realizable value of mortgage notes receivable is based on management's review and 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) evaluation of the collateral property securing the mortgage 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, discussions with the manager of the property and a review of the surrounding area. See "Recent Accounting Pronouncement," below. Results of Operations For the three and nine months ended September 30, 1995, the Trust had a net loss of $337,000 and $1.1 million, compared to a net loss of $180,000 and $531,000 for the three and nine months ended September 30, 1994. The primary factors contributing to the Trust's increased net loss are discussed in the following paragraphs. Net rental income (rental income less expenses applicable to rental income) increased from $2.5 million and $7.1 million for the three and nine months ended September 30, 1994 to $3.7 million and $10.9 million for the three and nine months ended September 30, 1995. Of this increase, $991,000 for the three months and $2.4 million for the nine months is due to the acquisition of six apartment complexes and two commercial properties subsequent to September 30, 1994. In addition, an increase of $238,000 for the three months and $885,000 for the nine months is due to the acquisition of four apartment complexes and one commercial property from January through September 1994 which did not contribute to net rental income for the full nine months in 1994. An additional increase of $593,000 for the nine months is due to an increase in occupancy rates and a decrease in operating expenses at one of the Trust's apartment complexes and two of the Trust's commercial properties. These increases are partially offset by a decrease in net rental income of $382,000 for the nine months at two of the Trust's apartment complexes and two of the Trust's commercial properties due to a decrease in occupancy rates and an increase in operating expenses. Interest income decreased from $726,000 and $2.2 million for the three and nine months ended September 30, 1994 to $196,000 and $600,000 for the three and nine months ended September 30, 1995. Of this decrease $405,000 for the three months and $1.2 million for the nine months is attributable to a $14.0 million wraparound mortgage note receivable which was paid in full in December 1994 and an additional $215,000 for the three months and $489,000 for the nine months is due to the foreclosure of two properties during 1994 and one property during 1995 which secured three of the Trust's other mortgage notes receivable. Interest income is expected to continue at approximately the third quarter's level for the remainder of 1995, as the Trust is not considering new mortgage lending except in connection with purchase money financing of sales of Trust properties. The Trust's equity in partnerships improved from a loss of $19,000 and $406,000 for the three and nine months ended September 30, 1994 to income of $28,000 and $213,000 for the three and nine months ended 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) September 30, 1995. This improvement in the operations of the Trust's equity affiliates is primarily due to higher occupancy and lower operating expenses at the warehouse facilities owned by Indcon, L.P., a joint venture partnership in which the Trust owns a 60% interest. See NOTE 2. "INVESTMENTS IN PARTNERSHIPS." Interest expense increased from $2.0 million and $5.5 million for the three and nine months ended September 30, 1994 to $2.5 million and $7.0 million for the three and nine months ended September 30, 1995. Of this increase, $612,000 for the three months and $1.3 million for the nine months is due to interest expense incurred on mortgages secured by properties acquired subsequent to September 30, 1994. An additional $118,000 for the three months and $342,000 for the nine months is due to interest expense incurred on five borrowings in 1994 and 1995, secured by mortgages on previously unencumbered apartment complexes. An additional increase of $353,000 for the nine months is due to interest expense incurred on mortgages secured by three properties acquired from January through August of 1994. These increases are partially offset by a decrease of $213,000 for the three months and $641,000 for the nine months due to the payoff of the underlying lien related to the payoff of a $14.0 million wraparound mortgage note receivable in December 1994. Depreciation increased from $801,000 and $2.3 million for the three and nine months ended September 30, 1994 to $1.1 million and $3.1 million for the three and nine months ended September 30, 1995. These increases are due to the acquisition of six apartment complexes and two commercial properties subsequent to September 30, 1994 and the acquisition of four apartment complexes and one commercial property from January through September 1994, on which depreciation was not recorded for the full nine months in 1994. A provision for losses of $541,000 was recognized in the three months ended March 31, 1995 to provide for the loss on the discounted payoff of the mortgage note receivable secured by Alderwood Apartments. See NOTE 3. "MORTGAGE NOTES RECEIVABLE." A provision for losses of $200,000 was recorded for the three months ended March 31, 1994 to provide for the loss on the sale of Oak Forest Apartments, one of the Trust's foreclosed properties held for sale. No provision for losses was recorded in the second and third quarters of either 1994 or 1995. Advisory fee to affiliate increased from $330,000 and $976,000 for the three and nine months ended September 30, 1994 to $394,000 and $1.1 million for the three and nine months ended September 30, 1995. These increases are due to an increase in the Trust's gross assets, the basis for the advisory fee, as a result of the acquisition of eight properties subsequent to September 30, 1994. The advisory fee is expected to continue to increase as the Trust makes additional property acquisitions. General and administrative expenses increased from $214,000 for the three months ended September 30, 1994 to $299,000 for the three months 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) ended September 30, 1995. This increase is due to an increase in professional fees related to property refinancings and shareholder communication expenses. General and administrative expenses were comparable for the nine months, with a decrease in legal and appraisal fees offset by an increase in expenses associated with shareholder communications. For the nine months ended September 30, 1994, the Trust recognized a gain on the sale of real estate of $577,000 related to the sale of an industrial warehouse by Indcon, L.P., a joint venture partnership in which the Trust owns a 60% interest. No such gain was recognized in the nine months ended September 30, 1995. Tax Matters As more fully discussed in the Trust's 1994 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 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. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Environmental Matters (Continued) 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. Recent Accounting Pronouncement In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of". The statement requires that long-lived assets be considered impaired "...if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset." If impairment exists, an impairment loss shall be recognized, by a charge against earnings, equal to "...the amount by which the carrying amount of the asset exceeds the fair value of the asset." If impairment of a long-lived asset is recognized, the carrying amount of the asset shall be reduced by the amount of the impairment, shall be accounted for as the asset's "new cost" and such new cost shall be depreciated over the asset's remaining useful life. SFAS No. 121 further requires that long-lived assets held for sale "...be reported at the lower of carrying amount or fair value less cost to sell." If a reduction in a held for sale asset's carrying amount to fair value less cost to sell is required, a provision for loss shall be recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale asset's fair value less cost to sell shall be recorded as an adjustment to the asset's carrying amount, but not in excess of the asset's carrying amount when originally classified or held for sale. A corresponding charge or credit to earnings is to be recognized. Long-lived assets held for sale are not to be depreciated. SFAS No. 121 is effective for fiscal years beginning after December 15, 1995. The Trust's management has not fully evaluated the effects of adopting SFAS No. 121, but expects that the Trust's policy with regard to the classification of foreclosed revenue producing properties as assets held for sale will require reevaluation. The Trust's management estimates that if the Trust had adopted SFAS No. 121 effective January 1, 1995, without a change in its policy of classifying foreclosed revenue producing assets as held for sale, its depreciation in the three and nine months ended September 30, 1995 would have been reduced by $103,000 and $295,000, respectively, its net loss in each period would have been reduced by a like amount and that a provision for loss for either impairment of its properties held for investment or for a decline in estimated fair value less cost to sell of its properties held for sale would not have been required in either period. 16 17 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit Number Description - ------- ----------------------------------------------------- 27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows: A Current Report on Form 8-K, dated July 31, 1995, was filed with respect to Item 2. "Acquisition or Disposition of Assets," and Item 7. "Financial Statements and Exhibits," which reports the acquisition of the McCallum Glen Apartments and which was amended by Form 8-K/As, filed September 7, 1995 and October 23, 1995. 17 18 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: November 13, 1995 By: /s/ Randall M. Paulson ------------------------- ----------------------------------- Randall M. Paulson President Date: November 13, 1995 By: /s/ Thomas A. Holland ------------------------- ----------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
18 19 CONTINENTAL MORTGAGE AND EQUITY TRUST EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Quarter Ended September 30, 1995
Exhibit Page Number Description Number - ------- --------------------------------------------------- ------ 27.0 Financial Data Schedule. 20
19 EX-27 2 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 6,954 4,824 8,800 9,207 0 0 191,945 16,588 204,641 0 121,920 0 0 0 76,873 204,641 0 27,318 0 16,456 3,133 541 6,998 (1,064) 0 (1,064) 0 0 0 (1,064) (.36) (.36)
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