-----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, MEjEDmvpJKeeA7wZT/5whsCdLPswtTyvvdPUca8yaMwp3EDrLAYSF+31BWAurlZ2 lgu0YGXIAjDAGAtgJwtENA== 0000950134-97-007970.txt : 19971106 0000950134-97-007970.hdr.sgml : 19971106 ACCESSION NUMBER: 0000950134-97-007970 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971105 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: 97708108 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 09/30/97 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, 1997 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 4,025,970 - ------------------------------ ----------------------------------- (Class) (Outstanding at October 31, 1997) 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, 1997 1996 -------------- -------------- (dollars in thousands) Assets ------ Notes and interest receivable Performing......................................... $ 4,457 $ 6,268 Nonperforming, nonaccruing......................... 1,626 2,287 -------------- -------------- 6,083 8,555 Less - allowance for estimated losses................ (1,481) (1,481) -------------- -------------- 4,602 7,074 Foreclosed real estate held for sale, net of accumulated depreciation ($725 in 1997 and 1996).............................................. 5,738 5,738 Real estate held for sale, net of accumulated depreciation ($137 in 1997)........................ 8,982 -- Real estate held for investment, net of accumulated depreciation ($19,317 in 1997 and $16,713 in 1996) 247,182 214,460 Investment in marketable equity securities of affiliates, at market.............................. 12,202 6,192 Investments in partnerships.......................... 2,084 2,293 Cash and cash equivalents............................ 918 2,961 Other assets (including $283 in 1997 and $650 in 1996 from affiliates).............................. 14,890 11,292 -------------- -------------- $ 296,598 $ 250,010 ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED BALANCE SHEETS - Continued
September 30, December 31, 1997 1996 -------------- -------------- (dollars in thousands) Liabilities and Shareholders' Equity ------------------------------------ Liabilities Notes and interest payable.......................... $ 199,245 $ 160,554 Other liabilities (including $1,360 in 1997 and $1,318 in 1996)................................... 10,192 10,273 -------------- -------------- 209,437 170,827 Commitments and contingencies Shareholders' equity Shares of Beneficial Interest, no par value; authorized shares, unlimited; issued and out- standing, 4,025,982 shares in 1997 and 4,026,376 shares in 1996.................................... 8,068 8,068 Paid-in capital..................................... 257,159 257,159 Accumulated distributions in excess of accumulated earnings.......................................... (188,963) (190,931) Net unrealized gains on marketable equity securities of affiliates.......................... 10,897 4,887 -------------- -------------- 87,161 79,183 -------------- -------------- $ 296,598 $ 250,010 ============== ==============
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 Nine Months Ended September 30, Ended September 30, ---------------------------------- --------------------------------- 1997 1996 1997 1996 -------------- -------------- --------------- ------------- (dollars in thousands, except per share) Revenue Rentals..................... $ 14,425 $ 11,435 $ 40,630 $ 33,205 Interest.................... 263 268 729 821 -------------- -------------- --------------- ------------- 14,688 11,703 41,359 34,026 Expenses Property operations......... 8,445 7,188 23,576 20,091 Interest.................... 4,350 3,254 12,245 9,317 Depreciation................ 1,586 1,271 4,563 3,565 Provision for losses........ -- (884) -- (884) Advisory fee to affiliate... 548 449 1,552 1,300 Net income fee to affiliate. (99) -- 287 -- General and administrative.. 817 461 2,219 1,400 -------------- -------------- --------------- ------------- 15,647 11,739 44,442 34,789 -------------- -------------- --------------- ------------- (Loss) from operations....... (959) (36) (3,083) (763) Equity in income (loss) of partnerships................ (17) 21 56 197 Gain (loss) on sale of real estate...................... (245) 3,598 6,565 9,397 -------------- -------------- --------------- ------------- Income (loss) before extraordinary gain.......... (1,221) 3,583 3,538 8,831 Extraordinary gain........... -- 149 -- 812 -------------- -------------- --------------- ------------- Net income (loss)............ $ (1,221) $ 3,732 $ 3,538 $ 9,643 ============== ============== =============== ============= Earnings per share Income (loss) before extra- ordinary gain............... $ (.30) $ .86 $ .88 $ 2.08 Extraordinary gain.......... -- .04 -- .20 -------------- -------------- --------------- ------------- Net income (loss)........... $ (.30) $ .90 $ .88 $ 2.28 ============== ============== =============== ============= Weighted average shares of beneficial interest used in computing earnings per share 4,025,985 4,184,086 4,026,061 4,243,754 ============== ============== =============== =============
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 Unrealized Shares of Distributions Gains on Beneficial Interest in Excess of Marketable ---------------------- Paid-in Accumulated Equity Shareholders' Shares Amount Capital Earnings Securities Equity --------- -------- ---------- -------------- ---------- ------------- (dollars in thousands, except per share) Balance, January 1, 1997.................... 4,026,376 $ 8,068 $ 257,159 $ (190,931) $ 4,887 $ 79,183 Fractional shares......... (394) -- -- -- -- -- Distributions ($.39 per share).............. -- -- -- (1,570) -- (1,570) Unrealized gains on marketable equity securities.............. -- -- -- -- 6,010 6,010 Net income................ -- -- -- 3,538 -- 3,538 --------- -------- ---------- ----------- -------- -------- Balance, September 30, 1997.................... 4,025,982 $ 8,068 $ 257,159 $ (188,963) $ 10,897 $ 87,161 ========= ======== ========== =========== ======== ========
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 Nine Months Ended September 30, ----------------------------- 1997 1996 ---------- ------------ (dollars in thousands) Cash Flows from Operating Activities Rents collected................................... $ 40,397 $ 32,925 Interest collected................................ 784 462 Interest paid..................................... (11,343) (8,270) Payments for property operations.................. (21,533) (18,666) General and administrative expenses paid.......... (2,640) (1,282) Advisory and net income fee paid to affiliate..... (2,986) (1,300) Distributions from partnerships' operating cash flow.......................................... 228 844 Other............................................. (1,462) 2,581 ---------- ------------ Net cash provided by operating activities..... 1,445 7,294 Cash Flows from Investing Activities Acquisition of real estate........................ (19,579) (18,996) Real estate improvements.......................... (3,759) (667) Funding of capital improvement escrow............. -- (1,500) Proceeds from sale of real estate................. 14,388 14,673 Funding of notes receivable....................... (73) (1,870) Collections on notes receivable................... 2,339 1,117 Distributions from partnerships' investing activities.................................... 36 10,720 Deferred financing costs.......................... (525) (1,961) ---------- ------------ Net cash provided by (used in) investing activities.................................. (7,173) 1,516 Cash Flows from Financing Activities Distributions to shareholders..................... (1,570) (3,241) Proceeds from notes payable....................... 28,105 28,427 Payments on notes payable......................... (22,850) (21,943) Repurchase of shares of beneficial interest....... -- (1,902) ---------- ------------ Net cash provided by financing activities..... 3,685 1,341 ---------- ------------ Net increase (decrease) in cash and cash equivalents....................................... (2,043) 10,151 Cash and cash equivalents, beginning of period..... 2,961 6,386 ---------- ------------ Cash and cash equivalents, end of period........... $ 918 $ 16,537 ========== ============
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 Nine Months Ended September 30, ------------------------------- 1997 1996 ----------- ---------- (dollars in thousands) Reconciliation of net income to net cash provided by operating activities Net income......................................... $ 3,538 $ 9,643 Adjustments to reconcile net income to net cash provided by operating activities Depreciation..................................... 4,563 3,565 Provision for losses............................. - (884) Gain on sale of real estate...................... (6,565) (9,397) Extraordinary gain............................... - (812) (Increase) decrease in interest receivable....... 208 (44) (Increase)/decrease in other assets.............. (495) 4,801 Increase in other liabilities.................... 24 299 (Decrease) in interest payable................... - (524) Distributions from partnerships' operating cash flow........................................... 228 844 Equity in (income) of partnerships............... (56) (197) -------------- -------------- Net cash provided by operating activities...... $ 1,445 $ 7,294 ============== ============== Noncash investing and financing activities Notes payable from acquisition of real estate.... $ 8,056 $ 3,200 Unrealized gain on marketable equity securities.. 6,010 1,927 Note receivable from sale of real estate......... -- 750
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 nine month period ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996 ("1996 Form 10-K"). NOTE 2. INVESTMENTS IN PARTNERSHIPS The Trust's investments in equity method partnerships consisted of the following at September 30, 1997: Sacramento Nine ("SAC 9")............. $ 163 Indcon, L.P. ("Indcon")............... 1,921 -------- $ 2,084 ========
The Trust and National Income Realty Trust ("NIRT") are partners in 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. 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 1997, Indcon sold one of its industrial warehouse properties for $60,000 in cash, of which the Trust's equity share was $36,000. Indcon recognized a loss of $82,000 on the sale, of which the Trust's equity share was $49,000. The Trust has entered into a contract to acquire the 40% of Indcon that it does not already own for $1.6 million in cash. [THIS SPACE INTENTIONALLY LEFT BLANK.] 8 9 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 equity method partnerships for the nine months ended September 30, 1997: Rents................................... $ 1,363 Depreciation............................ (357) Property operations..................... (390) Interest expense........................ (291) Loss on sale of real estate............. (82) -------- Net income.............................. $ 243 ========
NOTE 3. MORTGAGE NOTES RECEIVABLE One of the Trust's notes receivable, with a principal balance of $1.4 million, matured in November 1995. In February 1997, the Trust received a payment of $470,000 from the borrower, $305,000 being applied against accrued but unpaid interest and $165,000 applied to reduce the principal balance of the note. In September 1997, the Trust received $1.4 million in full payment of principal and all accrued but unpaid interest. As more fully discussed in NOTE 5. "NOTES PAYABLE," ten of the Company's mortgage notes receivable, with a combined principal balance, at the time, of $2.8 million were pledged as additional collateral on a $4.0 million loan, primarily secured by the AMOCO Building. In June and August 1997, two of the mortgage notes receivable, with a combined principal balance of $291,000, were paid in full. Such payments were applied to reduce the mortgage note payable. In June 1997, the Trust obtained financing in the amount of $1.4 million secured by the mortgage note receivable secured by the Cypress Creek Office Building in Fort Lauderdale, Florida. The financing bears interest at a variable rate, currently 9.0% per annum, requires monthly principal and interest payments of $14,126 and matures in June 2009. The Trust paid a mortgage brokerage and equity refinancing fee of $14,000 to Basic Capital Management, Inc. ("BCM"), the Trust's advisor, based on the $1.4 million financing. In July 1997, the note receivable secured by the Garden Villas Apartments in Phoenix, Arizona, matured. The borrower did not make the required principal payment at maturity. The note is classified as nonperforming at September 30, 1997. The Trust has instituted foreclosure proceedings and anticipates that it will not incur a loss as the estimated value of the collateral property exceeds the carrying value of the note. This note receivable is pledged as additional security for the AMOCO Building mortgage debt, as discussed above and in NOTE 5. "NOTES PAYABLE." NOTE 4. REAL ESTATE In January 1997, the Trust purchased the Madison at Bear Creek Apartments, a 180 unit apartment complex in Houston, Texas, for $3.5 9 10 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4. REAL ESTATE (Continued) million. The Trust paid $800,000 in cash and assumed the existing mortgage of $2.7 million. The mortgage bears interest at a variable rate, currently 9.29% per annum, adjusted semi-annually, requires monthly payments of principal and interest of $22,704, also adjusted semi-annually and matures in June 1999. The Trust paid a real estate brokerage commission of $125,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of BCM, the Trust's advisor, and an acquisition fee of $35,000 to BCM based on the $3.5 million purchase price of the property. In February 1997, the Trust purchased the Watters Road land, 103 acres of undeveloped land on State Highway 121 in Collin County, Texas, for $1.7 million in cash. The Trust paid a real estate brokerage commission of $68,000 to Carmel Realty and an acquisition fee of $17,000 to BCM based on the $1.7 million purchase price of the property. Also in February 1997, the Trust purchased the Jefferson Building, a 71,877 square foot office building in Washington, D.C., for $13.2 million. The Trust paid $4.1 million in cash and obtained new mortgage financing of $9.1 million. The mortgage bears interest at 8.0% per annum, requires monthly payments of principal and interest of $70,000 and matures in March 1999. The Trust paid a real estate brokerage commission of $319,000 to Carmel Realty and a $132,000 acquisition fee to BCM based on the $13.2 million purchase price of the property. In April 1997, the Trust sold Tollhill West, a 159,546 square foot office building in Dallas, Texas, for $14.8 million in cash. The Trust received net cash of $9.0 million after the payoff of $5.0 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Trust paid Carmel Realty a real estate brokerage commission of $244,000 based on the $14.8 million sales price of the property. The Trust recognized a gain on the sale of $5.4 million. Also in April 1997, the Trust purchased the OPUBCO land, 156 acres of undeveloped land in Collin County, Texas, for $3.0 million. In conjunction with the purchase, the Trust obtained mortgage financing secured by the land and by two other parcels of previously unencumbered land in the amount of $4.2 million. The Trust received net cash of $1.2 million. The mortgage bears interest at 9.5% per annum, requires monthly payments of interest only and matures in April 2000. The Trust paid a real estate brokerage commission of $109,000 to Carmel Realty and an acquisition fee of $30,000 to BCM based on the $3.0 million purchase price of the land. In May 1997, the Trust sold the 2626 Cole Building, a 119,632 square foot office building in Dallas, Texas, for $11.0 million in cash. The Trust received net cash of $4.2 million after the payoff of $6.5 million in existing mortgage debt and the payment of various closing costs associated with the sale. The Trust paid Carmel Realty a real estate 10 11 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4. REAL ESTATE (Continued) brokerage commission of $280,000 based on the $11.0 million sales price of the property. The Trust recognized a gain on the sale of $1.4 million. Also in May 1997, the Trust purchased the Trails at Windfern, a 240 unit apartment complex in Houston, Texas, for $4.2 million. The Trust paid $769,000 in cash, assumed the existing mortgage of $3.2 million and the seller provided purchase money financing of an additional $150,000. The $3.2 million mortgage bears interest at a variable rate, currently 9.0% per annum, adjusted annually, requires monthly payments of principal and interest of $26,674 and matures in January 1999. The $150,000 purchase money financing bears interest at 8.0% per annum, requires monthly payments of interest only and matures in May 2000. The Trust paid a real estate brokerage commission of $144,000 to Carmel Realty and an acquisition fee of $42,000 to BCM based on the $4.2 million purchase price of the property. In June 1997, the Trust purchased the Bay Plaza Office Center, a 75,780 square foot office building in Tampa, Florida, for $4.3 million. The Trust paid $1.2 million in cash, assumed the existing mortgage of $2.1 million with the seller providing purchase money financing of an additional $1.0 million. The $2.1 million mortgage bears interest at 8.3% per annum, requires monthly payments of principal and interest of $23,354 and matures in June 2009. The $1.0 million purchase money financing bears interest at 8.3% per annum, requires monthly payments of principal and interest of $9,731 and matures in June 2002. The Trust paid a real estate brokerage commission of $148,000 to Carmel Realty and an acquisition fee of $43,000 to BCM based on the $4.3 million purchase price of the property. Also in June 1997, the Trust purchased the Stacy Road land, 163 acres of undeveloped land in Allen, Texas, for $2.5 million. The Trust paid $800,000 in cash and obtained new mortgage financing of $1.7 million. The mortgage bears interest at 9.5% per annum, requires monthly payments of interest only of $14,000 and matures in April 2000. The Trust paid a real estate brokerage commission of $96,000 to Carmel Realty and an acquisition fee of $25,000 to BCM based on the $2.5 million purchase price of the land. In July 1997, the Trust purchased Durham Centre, a 207,171 square foot office building in Durham, North Carolina, for $20.5 million. The Trust paid $5.7 million in cash and obtained new mortgage financing of $14.8 million. The mortgage bears interest at 9.8% per annum, requires monthly payments of principal and interest of $132,407 and matures in July 2000. The loan is recourse to the Trust. The Trust paid a real estate brokerage commission of $428,000 to Carmel Realty and an acquisition fee of $205,000 to BCM based on the $20.5 million purchase price of the property. 11 12 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 4. REAL ESTATE (Continued) In August 1997, the Trust purchased the McKinney 140 land, 140 acres of undeveloped land in McKinney, Texas, for $2.6 million. The Trust paid $898,000 in cash and obtained new mortgage financing of $1.7 million. The mortgage bears interest at 9.5% per annum, requires monthly payments of interest only of $14,000 and matures in April 2000. The Trust paid a real estate brokerage commission of $98,000 to Carmel Realty and a $26,000 acquisition fee to BCM based on the $2.6 million purchase price of the property. Also in August 1997, the Trust sold Builders Square Shopping Center in St. Paul, Minnesota, for $2.4 million in cash. The Trust received net cash of $1.5 million after the payoff of $873,000 in existing mortgage debt and the payment of various closing costs associated with the sale. The Trust paid a real estate brokerage commission of $92,000 to Carmel Realty based on the $2.4 million sales price of the property. The Trust recognized a loss of $245,000 on the sale. Further in August 1997, the Trust purchased the Eagle Rock Apartments, a 99 unit apartment complex in Los Angeles, California, for $4.4 million. The Trust paid $1.1 million in cash with the seller providing purchase money financing for the remaining $3.3 million of the purchase price. The mortgage bears interest at 10.5% per annum, requires monthly payments of interest only and matures in February 1998. The Trust paid a real estate brokerage commission of $51,000 to Carmel Realty and an acquisition fee of $44,000 to BCM based on the $4.4 million purchase price of the property. NOTE 5. NOTES PAYABLE In March 1997, the Trust obtained mortgage financing in the amount of $4.0 million secured by the previously unencumbered AMOCO Building, an office building in New Orleans, Louisiana, and by ten mortgage notes receivable, with a combined principal balance, at the time, of $2.8 million. The Trust received net cash of $3.8 million after payment of various closing costs associated with the financing. The mortgage bears interest at 9.0% per annum, requires monthly payments of principal and interest of $35,989 and matures in March 1999. The Trust paid BCM a mortgage brokerage and equity refinancing fee of $40,000 based on the $4.0 million mortgage. As discussed in NOTE 3. "MORTGAGE NOTES RECEIVABLE," two of the mortgage notes receivable, with a combined principal balance of $291,000, were paid in full in June and August 1997. Such payments were remitted to the lender as a paydown of mortgage debt. In April 1997, the Trust refinanced the mortgage debt secured by the Willo-Wick Apartments in Pensacola, Florida in the amount of $3.3 million. The Trust received net cash of $311,000 after the payoff of $2.8 million in existing mortgage debt and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 9.13% per annum, requires monthly payments of principal and 12 13 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 5. NOTES PAYABLE (Continued) interest of $27,988 and matures in May 2007. The Trust paid BCM a mortgage brokerage and equity refinancing fee of $33,000 on the new $3.3 million mortgage. In May 1997, the Trust modified and extended the mortgage secured by the Rio Pinar Shopping Center in Orlando, Florida. In conjunction with the modification, the Trust made a principal reduction payment of $500,000. The modified and extended mortgage bears interest at 9.0% per annum, requires monthly payments of principal and interest of $49,465 and has an extended maturity of March 1999. $1.0 million of the mortgage is recourse to the Trust. In June 1997, the Trust refinanced the mortgage debt secured by the Northgate Distribution Center in Marietta, Georgia in the amount of $4.7 million. The Trust received net cash of $1.4 million after the payoff of $3.0 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the financing. The new mortgage bears interest at 8.82% per annum, requires monthly payments of principal and interest of $38,947 and matures in July 2007. The Trust paid BCM a mortgage brokerage and equity financing fee of $47,000 based on the new $4.7 million mortgage. Also in June 1997, the Trust refinanced the mortgage debt secured by the Edgewood Apartments in Lansing, Illinois in the amount of $9.4 million. The Trust received net cash of $858,000 after the payoff of $8.0 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 7.96% per annum, requires monthly payments of principal and interest of $68,529 and matures in July 2007. The Trust paid BCM a mortgage brokerage and equity refinancing fee of $94,000 on the new $9.4 million mortgage. In July 1997, the Trust refinanced the mortgage debt secured by the Heritage on the River Apartments in Jacksonville, Florida in the amount of $8.0 million. The Trust received net cash of $1.0 million after the payoff of $6.5 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at 8.125% per annum, requires monthly payments of principal and interest of $59,400 and matures in August 2007. The Trust paid BCM a mortgage brokerage and equity refinancing fee of $80,000 on the new $8.0 million mortgage. NOTE 6. COMMITMENTS AND CONTINGENCIES The Trust is involved in various lawsuits arising in the ordinary course of business. Management of the Trust is of the opinion that the outcome of these lawsuits would have no material impact on the Trust's financial condition, results of operations or liquidity. 13 14 CONTINENTAL MORTGAGE AND EQUITY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 7. SUBSEQUENT EVENTS At September 30, 1997, the Northpoint Central Office Building in Houston, Texas was under a firm contract for sale and was accordingly reclassified from real estate held for investment to real estate held for sale. In October 1997, the Trust completed the sale for $11.0 million in cash. The Trust received net cash of $4.7 million after the payoff of $5.8 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 $285,000 to Carmel Realty based on the $11.0 million sales price of the property. The Trust will recognize a gain on the sale of approximately $1.4 million. In October 1997, the Trust purchased the Westgrove Air Plaza, a 78,326 square foot combination aircraft hangar and office building in Addison, Texas, for $2.4 million. The Trust paid $1.2 million in cash and the seller provided purchase money financing for the remaining $1.2 million of the purchase price. The purchase money financing bears interest at a variable rate, currently 10.5%% per annum, requires monthly payments of interest only, currently $10,000 and matures in April 1998. The Trust paid a real estate brokerage commission of $91,000 to Carmel Realty and a $24,000 acquisition fee to BCM based on the $2.4 million purchase price of the property. Also in October 1997, the Trust purchased the Cypresstree Apartments, a 168 unit apartment complex in Houston, Texas, for $3.2 million. The Trust paid $550,000 in cash and the seller provided purchase money financing for the remaining $2.6 million of the purchase price. The purchase money financing bears interest at 10.0% per annum, requires monthly payments of interest only of $21,667 and matures in December 1998. The Trust paid a real estate brokerage commission of $114,500 to Carmel Realty and a $31,500 acquisition fee to BCM based on the $3.2 million purchase price of the property. -------------------------- 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 $918,000 at September 30, 1997, compared with $3.0 million at December 31, 1996. The principal reasons for the decrease in cash are discussed in the paragraphs below. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) 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 $14.3 million in the first nine months of 1996 to $18.9 million in the first nine months of 1997. This net increase of $4.6 million is the result of the Trust acquiring eighteen additional income producing properties during 1996 and 1997. The increase due to increased rental and occupancy rates and lower operating expenses at the Trust's apartment complexes and commercial properties was offset by the sale of two office buildings and one shopping center in 1997 and five apartment complexes in 1996. 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 three months of 1996 and first nine months of 1997. In January 1997, the Trust purchased the Madison at Bear Creek Apartments, a 180 unit apartment complex in Houston, Texas, for $3.5 million. The Trust paid $800,000 in cash and assumed the existing mortgage of $2.7 million. In February 1997, the Trust purchased the Watters Road land, 103 acres of undeveloped land on State Highway 121 in Collin County, Texas, for $1.7 million in cash. Also in February 1997, the Trust purchased the Jefferson Building, a 71,877 square foot office building in Washington, D.C., for $13.2 million. The Trust paid $4.1 million in cash and obtained new mortgage financing of $9.1 million. In March 1997, the Trust obtained mortgage financing, in the amount of $4.0 million, secured by the previously unencumbered AMOCO Building, an office building in New Orleans, Louisiana, and by ten mortgage notes receivable with a combined principal balance, at the time, of $2.8 million. The Trust received net cash of $3.8 million after payment of various closing costs associated with the financing. In June and August 1997, two of the mortgage notes receivables, with a combined principal balance of $291,000, were paid in full. Such payments were remitted to the lender as a paydown on the mortgage debt. In April 1997, the Trust sold Tollhill West, a 159,546 square foot office building in Dallas, Texas, for $14.8 million in cash. The Trust 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) received net cash of $9.0 million after the payoff of $5.0 million in existing mortgage debt and the payment of various closing costs associated with the sale. Also in April 1997, the Trust purchased the OPUBCO land, 156 acres of undeveloped land in Collin County, Texas, for $3.0 million. In conjunction with the purchase, the Trust obtained mortgage financing secured by the land and by two other parcels of previously unencumbered land in the amount of $4.2 million. The Trust received net cash of $1.3 million. Further in April 1997, the Trust refinanced the mortgage debt secured by the Willo-Wick Apartments in Pensacola, Florida in the amount of $3.3 million. The Trust received net cash of $311,000 after the payoff of $2.8 million in existing mortgage debt and the payment of various closing costs associated with the refinancing. In May 1997, the Trust sold the 2626 Cole Building, a 119,632 square foot office building in Dallas, Texas. The property was sold for $11.0 million in cash. The Trust received net cash of $4.2 million after the payoff of $6.5 million in existing mortgage debt and the payment of various closing costs associated with the sale. Also in May 1997, the Trust purchased the Trails at Windfern Apartments, a 240 unit apartment complex in Houston, Texas, for $4.2 million. The Trust paid $769,000 in cash, assumed the existing mortgage of $3.2 million and the seller provided purchase money financing of an additional $150,000. In June 1997, the Trust purchased the Bay Plaza Office Center, a 75,780 square foot office building in Tampa, Florida, for $4.3 million. The Trust paid $1.2 million in cash, assumed the existing mortgage of $2.1 million with the seller providing purchase money financing of an additional $1.0 million. Also in June 1997, the Trust purchased the Stacy Road land, 163 acres of undeveloped land in Allen, Texas, for $2.5 million. The Trust paid $800,000 in cash and obtained new mortgage financing of $1.7 million. Also in June 1997, the Trust obtained financing in the amount of $1.4 million secured by the mortgage note receivable secured by the Cypress Creek Office Building in Fort Lauderdale, Florida. Further in June 1997, the Trust refinanced the mortgage debt secured by the Northgate Distribution Center in Marietta, Georgia in the amount of $4.7 million. The Trust received net cash of $1.4 million after the payoff of $3.0 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) Also in June 1997, the Trust refinanced the mortgage debt secured by the Edgewood Apartments in Lansing, Illinois in the amount of $9.4 million. The Trust received net cash of $858,000 after the payoff of $8.0 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. In July 1997, the Trust purchased Durham Centre, a 207,171 square foot office building in Durham, North Carolina, for $20.5 million. The Trust paid $5.7 million in cash and obtained new mortgage financing of $14.8 million. Also in July 1997, the Trust refinanced the mortgage debt secured by the Heritage on the River Apartments in Jacksonville, Florida in the amount of $8.0 million. The Trust received net cash of $1.0 million after the payoff of $6.5 million in existing mortgage debt, the funding of escrows and the payment of various closing costs associated with the refinancing. In August 1997, the Trust sold Builders Square Shopping Center in St. Paul, Minnesota, for $2.4 million in cash. The Trust received $1.5 million after the payoff of $873,000 in existing mortgage debt and the payment of various closing costs associated with the sale. Also in August 1997, the Trust purchased the Eagle Rock Apartments, a 99 unit apartment complex in Los Angeles, California, for $4.4 million. The Trust paid $1.1 million in cash with the seller providing purchase money financing of $3.3 million. In September 1997, the Trust received payment in full of a mortgage note receivable with a principal balance of $1.3 million. In October 1997, the Trust sold Northpoint Central Office Building in Houston, Texas, for $11.0 million. The Trust received net cash of $4.7 million after the payoff of $5.8 million in existing mortgage debt and the payment of various closing costs associated with the sale. Also in October 1997, the Trust purchased the Westgrove Air Plaza, a 78,326 square foot combination aircraft hangar and office building in Addison, Texas, for $2.4 million. The Trust paid $1.2 million in cash and the seller provided purchase money financing of $1.2 million. The Trust has entered into a contract to acquire the 40% of Indcon, L.P. ("Indcon"), a joint venture partnership, that it does not already own for $1.6 million in cash. The Trust's Board of Trustees has authorized the Trust to repurchase a total of 1,465,000 of its shares of beneficial interest, of which 19,371 shares remain to be purchased as of September 30, 1997. Through September 30, 1997, the Trust had repurchased 1,445,629 of its shares at a total cost to the Trust of $7.7 million, none of which were purchased in the first nine months of 1997. 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) In the first nine months of 1997, the Trust paid quarterly distributions of $.39 per share or a total of $1.6 million. The Trust's management reviews the carrying value of the Trust's mortgage notes receivable and properties at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. In those instances where impairment is found to exist, a provision for loss is recorded by a charge against earnings. The Trust's mortgage note receivable review includes an evaluation of the collateral property securing such note. The property review generally includes selective property inspections, a review of the property's current rents compared to market rents, a review of the property's expenses, a review of maintenance requirements, a review of the property's cash flow, discussions with the manager of the property and a review of properties in the surrounding area. Results of Operations For the nine months ended September 30, 1997, the Trust had net income of $3.5 million, including second quarter gains on sale of real estate of $6.8 million, compared to net income of $9.6 million for the nine months ended September 30, 1996, which included gains on sale of real estate and extraordinary gains totaling $10.2 million. For the three months ended September 30, 1997, the Trust had a net loss of $1.2 million including a $245,000 loss on sale of real estate, compared to net income of $3.7 million for the three months ended September 30, 1996, which included gains on sale of real estate and extraordinary gains totaling $3.7 million. Fluctuations in these and other components of the Trust's revenues and expenses between the 1996 and 1997 periods are discussed below. Rents increased from $11.4 million and $33.2 million for the three and nine months ended September 30, 1996 to $14.4 million and $40.6 million for the three and nine months ended September 30, 1997. Of these increases, $1.5 million and $7.4 million is attributable to the acquisition of four apartment complexes and eight commercial properties in 1996 and an additional $2.1 million and $3.4 million is attributable to the acquisition of three apartment complexes and three commercial properties in 1997. The remainder of the increases 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 $675,000 and $3.4 million due to the sale of five apartment complexes in 1996 and three commercial properties in 1997 and a further decrease of $461,000 and $1.4 million is due to the loss of a property to foreclosure in 1996. Rents are expected to continue to increase due to the properties acquired in 1996 and 1997. 18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) Interest income was $268,000 and $821,000 for the three and nine months ended September 30, 1996 compared to $263,000 and $729,000 for the three and nine months ended September 30, 1997. These decreases are due to decreases of $81,000 and $146,000 in short-term investment income and decreases of $8,000 and $35,000 due to the payoff of a note receivable. The decreases are partially offset by a new loan funded in 1996 and to the payoff in September 1997 of a note receivable on which the Trust only recognized interest income as cash was received. Interest income in the remaining three months of 1997 is expected to decrease due to the loan payoffs. Property operating expenses increased from $7.2 million and $20.1 million for the three and nine months ended September 30, 1996 to $8.4 million and $23.6 million for the three and nine months ended September 30, 1997. Of these increases, $920,000 and $4.6 million is due to the acquisition of four apartment complexes and eight commercial properties in 1996 and an additional $976,000 and $1.6 million is due to the acquisition of three apartment complexes and three commercial properties in 1997. These increases are partially offset by decreases of $457,000 and $2.1 million due to the sale of five apartment complexes in 1996 and three commercial properties in 1997 and a further decrease of $249,000 and $808,000 due to the loss of a property to foreclosure in 1996. Property operating expenses are expected to continue to increase due to the properties acquired in 1996 and 1997. Interest expense increased from $3.3 million and $9.3 million for the three and nine months ended September 30, 1996 to $4.4 million and $12.2 million for the three and nine months ended September 30, 1997. Of these increases, $1.3 million and $3.5 million is due to interest expense recorded on mortgages secured by ten properties, encumbered by debt, acquired in 1996 and nine properties, encumbered by debt, acquired in 1997. An additional $21,000 and $645,000 is due to interest expense recorded on borrowings in 1996 and 1997, secured by mortgages on a previously unencumbered commercial property and by a note receivable in 1997, two previously unencumbered apartment complexes and two previously unencumbered commercial properties in 1996 and the refinancing of four existing mortgages in 1997 and seven existing mortgages in 1996 where the loan balance was increased. These increases are partially offset by decreases of $178,000 and $885,000 due to the sale of three apartment complexes encumbered by debt in 1996 and three commercial properties in 1997 and a further decrease of $165,000 and $495,000 due to the loss of a property to foreclosure in 1996. Interest expense is expected to increase in the remainder of 1997, as a result of properties acquired or refinanced in 1996 and properties acquired or refinanced in 1997. Depreciation expense increased from $1.3 million and $3.6 million for the three and nine months ended September 30, 1996 to $1.6 million and $4.6 million for the three and nine months ended September 30, 1997. These increases are due to the acquisition of four apartment complexes and eight commercial properties in 1996 and three apartment complexes and three commercial properties in 1997, partially offset by the sales 19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) of three commercial properties in 1997 and five apartment complexes in 1996. Depreciation is expected to increase during the remainder of 1997, as a result of the properties acquired in 1996 and the properties acquired in the first nine months of 1997. A negative provision for losses of $884,000 was recognized in the three and nine months ended September 30, 1996. Such negative provision represents accrued interest recorded on a mortgage between February 1995, the date the Trust stopped making payments on the mortgage, and September 1996 when the property was transferred to the lender. Advisory fee to affiliate increased from $449,000 and $1.3 million for the three and nine months ended September 30, 1996 to $548,000 and $1.6 million for the three and nine months ended September 30, 1997. This increase is due to an increase in the Trust's gross assets, the basis for the advisory fee, as a result of the acquisition of thirteen properties in 1996 and ten properties in 1997 partially offset by the sale of three commercial properties in 1997 and five apartment complexes in 1996. The advisory fee is expected to continue to increase as the Trust makes additional property acquisitions. A net income fee of $(99,000) and $287,000 was recorded by the Trust for the three and nine months ended September 30, 1997 as a result of the gains totaling $6.8 million from the sale of two commercial properties as discussed below. No such fee was recorded by the Trust in 1996. General and administrative expenses increased from $461,000 and $1.4 million for the three and nine months ended September 30, 1996 to $817,000 and $2.2 million for the three and nine months ended September 30, 1997. These increases are primarily attributable to an increase in legal and professional fees, directors and officers insurance premiums and Advisor cost reimbursements. The Trust's equity in earnings of partnerships was $21,000 and $197,000 for the three and nine months ended September 30, 1996 as compared to a loss of $17,000 and income of $56,000 in the three and nine months ended September 30, 1997. Included in equity earnings of partnerships for the three and nine months ended September 30, 1997 is a $49,000 loss on sale of real estate, the Trust's equity share of the loss recognized by Indcon on the sale of one of its industrial warehouses. Included in equity earnings of partnerships for the nine months ended September 30, 1996 is a $370,000 gain on sale of real estate, the Trust's equity share of the gain recognized by Indcon, on the sale of 27 of its industrial warehouses. Excluding such gain, the Trust's equity in earnings of partnerships would have been a loss of $173,000 and income of $105,000 for the nine months ended September 30, 1996 and 1997. This increase in equity in earnings of partnerships is primarily due to improved performance by the remaining joint venture partnerships' properties. Equity in earnings of partnerships is expected to be minimal for the remainder of 1997. 20 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) A loss of $245,000 was recognized in the three months ended September 30, 1997 on the sale of Builders Square Shopping Center. See NOTE 4. "REAL ESTATE." For the nine months ended September 30, 1997, the Trust recognized gains on the sale of real estate of $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. For the three and nine months ended September 30, 1996, the Trust recognized gains on the sale of real estate of $378,000 on the sale of Rivertree Apartments in February 1996, $5.4 million on the sale of Sunset Towers Apartments in May 1996 and $3.6 million on the sale of Southgate Apartments in August 1996. See NOTE 4. "REAL ESTATE." In the three months ended September 30, 1996, the Trust recognized an extraordinary gain of $149,000 representing an insurance settlement at the Rivertree Apartments which the Trust had sold in February 1996. In the nine months ended September 30, 1996, the Trust recognized an extraordinary gain of $663,000, its equity share of an insurance settlement from a fire loss of one of Indcon's industrial warehouses. No such gains were recognized in 1997. Tax Matters As more fully discussed in the Trust's 1996 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 21 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Environmental Matters (Continued) remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from the Trust for personal injury associated with such materials. The Trust's management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Trust's business, assets or results of operations. -------------------------- 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 Stipulation of 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 Modification, and during August and September 1996, the Court held evidentiary hearings to assess compliance with the terms of the 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 22 23 ITEM 1. LEGAL PROCEEDINGS (Continued) Amendment to the 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. 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. 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 the conduct of its business as a corporation under Nevada law. The Trust has filed a Proxy Statement/Prospectus with the Securities and Exchange Commission providing for a special meeting of the Trust's shareholders. At such meeting the Trust's shareholders will vote on this proposal. Approval requires the vote of a majority of the Trust's outstanding shares of beneficial interest. As of October 31, 1997 the Trust's advisor and its affiliates held shares representing approximately 54.4% of the Trust's outstanding shares. Under the Olive Amendment (see Part II, ITEM 1. "LEGAL PROCEEDINGS") the Trust's advisor and its affiliates have discretionary authority to vote their shares on this matter, up to 40% of the Trust's shares outstanding. Any shares owned in excess of 40% of the Trust's outstanding shares, must be voted pro rata with the votes cast by all nonaffiliated shareholders of the Trust. Also, pursuant to the Olive Amendment, the proposal will not be presented to the Trust's shareholders until the four new unaffiliated Board members have been seated and the Board reapproves the proposal. 23 24 ITEM 5. OTHER INFORMATION (Continued) Accordingly, a date for the special meeting of the Trust's shareholders to vote on the incorporation proposal has not been set. 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 July 18, 1997, was filed with respect to Item 2. "Acquisition and Disposition of Assets," and Item 7. "Financial Statements and Exhibits," which reports the acquisition of the Durham Centre Office Building and the McKinney 140 land. A Current Report on Form 8-K, dated August 18, 1997, was filed with respect to Item 2. "Acquisition and Disposition of Assets," and Item 7. "Financial Statements and Exhibits," which reports the acquisition of Eagle Rock Apartments. 24 25 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 5, 1997 By: /s/ Randall M. Paulson ------------------------- ----------------------------------- Randall M. Paulson President Date: November 5, 1997 By: /s/ Thomas A. Holland ------------------------- ----------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 25 26 CONTINENTAL MORTGAGE AND EQUITY TRUST EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Nine Months Ended September 30, 1997
Exhibit Page Number Description Number - ------- ----------------------------------------- ------ 27.0 Financial Data Schedule. 27
26 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 918 12,202 6,083 1,481 0 0 282,081 20,179 296,598 0 199,245 0 0 0 87,161 296,598 0 40,630 0 23,576 4,563 0 12,245 3,538 0 3,538 0 0 0 3,538 .88 .88
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