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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number: 1-14167
CLARION COMMERCIAL HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Maryland 13-3988895
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 Madison Avenue, New York, New York 10017
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (212) 883-2500
NOT APPLICABLE
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(Former name, former address, and former fiscal year if
changed since last report)
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.
(1) Yes X No
(2) Yes No X
As of August 12, 1998, 4,746,450 shares of voting common stock
($.001 par value) were outstanding.
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CLARION COMMERCIAL HOLDINGS, INC.
FORM 10-Q
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Interim Financial Statements (Unaudited) 3
Consolidated Statement of Financial Condition at
June 30, 1998 3
Consolidated Statement of Operations for the period
June 2, 1998 (commencement of operations) through
June 30, 1998 4
Consolidated Statement of Changes in Stockholders'
Equity for the period June 2, 1998 (commencement
of operations) through June 30, 1998 5
Consolidated Statement of Cash Flows for the period
June 2, 1998 (Commencement of Operations) through
June 30, 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES
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Clarion Commercial Holdings, Inc. & Subsidiaries
Consolidated Statement of Financial Condition
June 30, 1998
(Unaudited)
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<S> <C>
Assets:
Cash and cash equivalents $ 1,925,339
Securities - trading, at fair value 224,299,951
Commercial mortgage loan receivable 13,052,642
Other investments 7,307,638
Accrued interest receivable 1,798,407
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Total assets $248,383,977
============
Liabilities and Stockholders' Equity:
Liabilities:
Repurchase agreements $147,678,000
Payable for purchase of Treasury stock 1,640,100
Dividends payable 724,605
Other liabilities 1,851,235
------------
Total liabilities 151,893,940
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Stockholders' equity:
Preferred Stock, par value $.01 per share,
25,000,000 shares authorized; no shares issued -
Class A Common Stock, par value $.001 per share
74,000,000 sharers authorized; 5,000,750 issued;
4,895,150 shares outstanding 5,001
Class B Common Stock, par value $.001 per share
1,000,000 shares authorized; 175,000 issued
and outstanding 175
Additional paid-in capital 98,092,869
Retained earnings 32,092
Treasury stock -- (105,600 shares), at cost (1,640,100)
------------
Total stockholders' equity 96,490,037
------------
Total liabilities and stockholders' equity $248,383,977
============
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The accompanying notes are an integral part of these
consolidated financial statements.
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Clarion Commercial Holdings, Inc. & Subsidiaries
Consolidated Statement of Operations
For the Period June 2, 1998 (Commencement of Operations)
Through June 30, 1998
(Unaudited)
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Income:
Income from securities -- trading $1,558,974
Income from commercial mortgage loan 72,790
Income from other investments 30,858
Interest income from cash and cash equivalents 14,454
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Total income 1,677,076
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Expenses:
Interest 820,724
Management fee 79,360
Other expenses 20,295
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Total expenses 920,379
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Net Income $ 756,697
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Net income per share data:
Basic $ 0.146
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Diluted $ 0.146
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Weighted average number of shares outstanding:
Basic 5,172,109
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Diluted 5,172,109
==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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Clarion Commercial Holdings, Inc. & Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
For the Period June 2, 1998 (Commencement of Operations)
Through June 30, 1998
(Unaudited)
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<CAPTION>
Common Stock Additional
------------ Paid-In Retained Treasury
Shares Class A Class B Capital Earnings Stock Total
--------- ------- ------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 2, 1998 750 $ 1 $ -- $ 14,999 $ -- $ -- $ 15,000
Issuance of common stock:
Class A 5,000,000 5,000 -- 94,578,045 -- -- 94,583,045
Class B 175,000 -- 175 3,499,825 -- -- 3,500,000
Dividends:
Class A common stock -- -- -- -- (700,105) -- (700,105)
Class B common stock -- -- -- -- (24,500) -- (24,500)
Net income -- -- -- -- 756,697 -- 756,697
Treasury Stock (105,600) -- -- -- -- (1,640,100) (1,640,100)
--------- ------ ---- ----------- --------- ----------- -----------
Balance at June 30, 1998 5,070,150 $5,001 $175 $98,092,869 $ 32,092 $(1,640,100) $96,490,037
========= ====== ==== =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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Clarion Commercial Holdings, Inc. & Subsidiaries
Consolidated Statement of Cash Flows
For the Period June 2, 1998 (Commencement of Operations)
Through June 30, 1998
(Unaudited)
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Cash flows from operating activities:
Net income $ 756,697
Adjustments to reconcile net income to net cash provided
by operating activities:
Discount accretion, net (110,047)
Unrealized gain on investment in commercial mortgage-
backed securities (1,320,908)
Unrealized loss on investment in government securities 1,186,199
Increase in accrued interest receivable (1,798,407)
Increase in payable for purchase of treasury stock,
dividends payable & other liabilities 1,851,235
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Net cash provided by operating activities 564,769
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Cash flows from investing activities:
Purchase of investments:
Investment in commercial mortgage-backed securities (222,675,089)
Investment in government securities -- net (1,371,753)
Commercial mortgage loan receivable (13,059,465)
Investment in other assets (3,809,168)
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Net cash used in investing activities (240,915,475)
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Cash flows from financing activities:
Proceeds from repurchase agreements 147,678,000
Proceeds from issuance of common stock,
net of offering costs 94,598,045
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Net cash flows provided by financing activities 242,276,045
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Net increase in cash and cash equivalents
and balance at June 30, 1998 $ 1,925,339
=============
Supplemental information:
Interest paid $ 0
=============
</TABLE>
Supplemental disclosures of cash flow information:
* Dividends in the amount of $724,605 were declared
on June 17, 1998 and paid on July 15, 1998.
* Treasury stock in the amount of $1,640,100 purchased
on June 30, 1998 was paid for on July 6, 1998.
* The Company exchanged 175,000 class B shares
of common stock valued at $3,500,000 for a 10%
interest in a Limited Liability Company.
The accompanying notes are an integral part of these
consolidated financial statement
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NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of
Regulation S-X for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles ("GAAP") for complete financial statements. The
consolidated financial statements include the accounts of Clarion Commercial
Holdings, Inc. ("Clarion") and its subsidiaries (with Clarion, the "Company").
Clarion directly owns two subsidiaries, that will elect to be treated as real
estate investment trusts for tax purposes. CCHI General, Inc. ("General
Partner") and CLARCOMM Limited, Inc. ("Limited Partner"). General Partner and
Limited Partner own 1% and 99% respectively of CLARCOMM Holdings, L.P.
("Operating Partnership"). All intercompany transactions and balances are
eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments, consisting of normal and recurring accruals, necessary
for a fair presentation of the consolidated financial condition of the Company
at June 30, 1998 and the results of its operations, the changes in its
stockholders' equity and its cash flows for the 29-day period beginning June 2,
1998 (commencement of operations) through June 30, 1998. Operating results for
the period ended June 30, 1998 are not necessarily indicative of the results
that may be expected for any other interim periods or the period ending December
31, 1998.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated statement of financial condition and
revenues and expenses for the period covered. Actual results could differ from
those estimates and assumptions.
NOTE 2 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Clarion was incorporated in Maryland in February 1998 and commenced its
operations on June 2, 1998. The Company is a specialty finance company organized
to invest in commercial mortgage-backed securities (primarily subordinate
securities), commercial mortgage loans, mezzanine investments, equity
investments, and other real estate related investments.
A summary of the Company's significant accounting policies follows:
SECURITIES - TRADING
The Company's government securities and commercial mortgage-backed securities
are designated as trading assets because the Company is evaluating its current
portfolio of securities for possible sales or other dispositions in the near
term. Such securities are carried at estimated fair value, with the net
unrealized gains or losses included in earnings. Interest income is recognized
as it becomes receivable, and includes amortization of premiums
and accretion of discounts, computed using the effective yield method.
The Company may, in the future, determine that certain of these assets will be
held for longer periods of time, and will therefore, not be held principally for
the purpose of selling them in the near term. At that point of determination,
these assets may be hedged with longer term hedges such as swaps, forward swaps
or other instruments. In this case, such assets would be classified as
"Available-For-Sale" and any future unrealized gains and losses on the assets
and associated hedges would be reported in a separate component of shareholders
equity as dictated by SFAS 115.
COMMERCIAL MORTGAGE LOAN
The Company's investment in a commercial mortgage loan is carried at amortized
cost, with interest income recognized as it becomes receivable. The Company
periodically evaluates the collectibility of both interest and principal on its
loans to determine whether it is impaired. A loan is considered to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the existing contractual
terms. If a loan is determined to be impaired, a loss accrual is recorded
through income, determined by discounting the expected future cash flows at the
loan's effective interest rate or, for practical purposes, from the estimated
fair value of the collateral.
OTHER INVESTMENTS
The Company's 10% interest in Clarion Capital, LLC (the "Manager") and the
preferred interest in a limited partnership are accounted for at cost.
COMPREHENSIVE INCOME
The Company had no items of comprehensive income during the period ended June
30, 1998.
NET INCOME PER SHARE
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Net income per share is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share, and is calculated on
the basis of the weighted average number of common shares outstanding during the
period plus the additional dilutive effect of common stock equivalents. The
dilutive effect of outstanding stock options is calculated using the treasury
stock method.
For the period ending June 30, 1998, diluted net income per share was the same
as basic net income per share, because the exercise price of the Company's
outstanding stock options was in excess of the average trading price of the
Company's common stock during the period.
INCOME TAXES
The Company intends to elect to be taxed as a Real Estate Investment Trust
("REIT") and comply with the provisions of the Internal Revenue Code of 1986, as
amended, with respect thereto. Accordingly, the Company will not be subjected to
federal income tax to the extent of its distributions to stockholders and as
long as certain asset, income and stock ownership tests are met.
NOTE 3 SECURITIES - TRADING
The Company's securities - trading are carried at estimated fair value and were
comprised of the following at June 30, 1998:
Securities - trading
<TABLE>
<CAPTION>
Amortized Unrealized Fair
Cost Gain/(Loss) Value
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<S> <C> <C> <C>
Commercial Mortgage Backed Securities
Investment grade $ 32,187,938 $ 157,496 $ 32,345,434
Non-investment grade 190,605,551 1,163,412 191,768,963
U.S. Government Treasury Securities - net 185,554
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$ 224,299,951
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</TABLE>
During the period ended June 30, 1998, the Company entered into contracts to
sell securities that it did not own at the time of the sale, at a specified
price at a specified time (short sales). The Company utilizes these contracts as
a means of mitigating the potential financial statement impact of changes in the
fair value ("hedging") of its portfolio of commercial mortgage-backed securities
due to changes in interest rates. These contracts involve the short sale of U.S.
Treasury securities, and had terms that ranged from 1 day to 16 days. Risks in
these contracts arise from the possible inability of counterparties to meet the
terms of their contracts and from movements in securities values and interest
rates. If the market value of the securities involved in the short sale
increases, the Company may be required to meet a "margin call".
At June 30, 1998, the Company had open contracts to sell Treasury securities
with face amounts totaling $175.7 million. Although the Company generally does
not settle these contracts at expiration, but instead rolls them over into new
contracts, if the Company had settled its open contracts at June 30, 1998, the
counterparty would have been required to pay the Company $185,554.
The Company accounts for its short sales contracts at their market values, with
unrealized gains or losses recorded in earnings. The estimated unrealized loss
on these contracts at June 30, 1998 was $1,186,199, which is included in income
from securities-trading in the statement of operations. During the period ended
June 30, 1998, the Company recorded a realized loss of $210,501 from settled
contracts.
During the period June 2, 1998 to June 30, 1998, the Company was in the process
of acquiring its initial investment portfolio of securities. The composition of
the portfolio of securities shown above should not be considered indicative of
the composition of the portfolio that might be expected in the future.
The fair value of the Company's portfolio of commercial mortgage backed
securities and government securities is estimated by management based on market
prices provided by certain dealers who make a market in these financial
instruments. The fair values reported reflect estimates and may not necessarily
be indicative of the amounts the Company could realize in a current market
exchange.
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The income for securities - trading for the period consisted of interest income
of $1,634,766, net unrealized gains of $134,709 and a realized loss of $210,501
on U.S. Treasury securities sold.
NOTE 4 COMMON STOCK
Clarion common stock was sold through several transactions as follows:
Clarion was initially capitalized with the sale of 750 shares of Class A common
stock on February 18, 1998, for a total of $15,000. Clarion received commitments
on March 11, 1998 for the purchase, in private placements, of 1,000,000 shares
of Class A common stock at $20 per share for a total of $20,000,000. The sale of
these shares was consummated at the time of the closing of Clarion's initial
public offering.
On June 2, 1998, Clarion completed its initial public offering of Class A common
stock. Clarion issued 4,000,000 shares of Class A common stock at a price of $20
per share and received proceeds of $76,025,000, net of underwriting discounts
and commissions. Offering costs in connection with the public offering amounting
to approximately $1,442,000 have been charged against the proceeds of the
offering. Concurrent with the initial public offering, Clarion issued 175,000
shares of Class B common stock in exchange for a 10% interest in Clarion
Capital, LLC (the "Manager") and an option to purchase the remaining 90%
interest (or all of the assets of) the Manager for 90% of fair market value.
The option may be exercised between January 2, 2000 and March 31, 2001 only
with the approval of the Independent Directors.
On June 30, 1998, the Board of Directors of Clarion authorized a program to
repurchase up to 400,000 shares of Class A Common Stock (the "Stock Repurchase
Program"). Pursuant to the Stock Repurchase Program, purchases of Common Stock
will be made at the sole discretion of management in the open market or in
privately negotiated transactions until the earlier to occur of (i) the date on
which the Company acquires, in the aggregate, 400,000 shares of Class A Common
Stock or (ii) June 30, 1999.
On June 30, 1998, the Company acquired 105,600 shares of Class A Common Stock in
the open market at a cost of $1,640,100. Subsequent to June 30 and through
August 11, 1998, the Company had acquired an additional 148,700 shares in the
open market for an aggregate cost of $2,355,831.
NOTE 5 TRANSACTIONS WITH AFFILIATES
Clarion has entered into a Management Agreement (the "Management Agreement")
with the "Manager", the employer of certain directors and officers of Clarion,
under which the Manager manages the Company's day-to-day operations, subject to
the direction and oversight of Clarion's Board of Directors. The Company will
pay the Manager an annual base management fee equal to 1% of the average
stockholders' equity as further defined in the Management Agreement.
The Company will also pay the Manager, as incentive compensation, an amount
equal to 25% of the Adjusted Net Income of Clarion, before incentive
compensation, in excess of the amount that would produce an annualized return on
equity equal to 2.5% over the Ten-Year U.S. Treasury Rate as further defined in
the Management Agreement. For purposes of the incentive compensation
calculation, equity is generally defined as proceeds from issuance of common
stock before underwriting discounts and commissions and other costs of issuance.
In accordance with the terms of the Management Agreement, an accrual of $79,360
in base management fees was made for the period June 2, 1998 to June 30, 1998.
The Company did not accrue for, or pay, the Manager any incentive compensation
for the period June 2, 1998 to June 30, 1998.
On June 2, 1998, the Company acquired 22 classes of CMBS, one commercial
mortgage loan and a preferred interest in a limited partnership from Gramon
Fund (BVI), LP and Monroe Investment Corp., private funds managed by the
Manager, as described in "Exhibit 10.1 - Purchase & Sale Agreement between the
Company and Monroe Investment Corp." and "Exhibit 10.2 - Purchase & Sale
Agreement between the Company and Gramon Fund (BVI), LP".
NOTE 6 STOCK INCENTIVE PLAN
Clarion has adopted a stock incentive plan (the "1998 Stock Incentive Plan")
that provides for the grant of both non-qualified stock options, incentive stock
options that meet the requirements of Section 422 of the Code, stock awards,
deferred stock awards, dividend equivalents or other awards. Stock incentive
awards may be granted to the directors, officers, consultants and key employees
of Clarion, the Manager or affiliates of the Manager.
The exercise price for any stock option granted under the 1998 Stock Incentive
Plan may not be less than 100% of the fair market value of the shares of common
stock at the time the option is granted. Each option must terminate no more than
ten years from the date it is granted. Subject to anti-dilution provisions for
stock splits, stock dividends and similar events, the 1998 Stock Incentive Plan
authorizes the grant of awards in the aggregate of up to 590,900 shares of
common stock.
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On June 2, 1998, pursuant to the 1998 Stock Incentive Plan, options to purchase
350,000 shares of Class A common stock were granted. 178,250 shares were granted
to certain officers and directors of the Company, and 171,750 shares were
granted to certain officers and employees of the Manager and its affiliates. The
exercise price of these options is $20 per share. The remaining contractual life
of each option is approximately ten years. One third of the options vested on
June 30, 1998. The remaining options vest in equal installments on June 30,
1999, and June 30, 2000.
NOTE 7 REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance a portion of its
investments. As of June 30, 1998, the Company had entered into repurchase
agreements in the amount of $147,678,000. The weighted average maturity of the
agreements as of June 30 was 23 days and the weighted average borrowing rate was
6.1970%. The repurchase agreements were collateralized by sixteen classes of
commercial mortgage-backed securities with an aggregate estimated fair market
value of $165,141,887 at June 30, 1998.
As of June 30, 1998, all of the repurchase agreements had maturities of less
than 30 days.
NOTE 8 FAIR VALUE OF FINANCIAL INSTRUMENTS
As discussed above, the Company's portfolio of securities is carried at its
estimated fair value. Company management believes that the fair value of its
financial instruments, including the commercial mortgage loan, cash and cash
equivalents, and repurchase agreements approximates their carrying values, due
to the short-term nature of the instruments or the fact that their terms
approximate current market terms.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL: Clarion was organized in February 1998 to invest in commercial
mortgage-backed securities (primarily subordinate securities), commercial
mortgage loans, mezzanine investments, equity investments, and other real estate
related investments. Substantially all of the $94.6 million of net proceeds
received from the sale of 5,000,000 shares of its common stock in June 1998
together with the net proceeds of other financing arrangements has been used to
acquire the Company's current portfolio of investments. The Company is
currently performing due diligence on a variety of assets including preferred
equity investments, joint venture equity investments and interim loans.
The following discussion of the Company's financial condition, results of
operations, and capital resources and liquidity should be read in conjunction
with the Interim Financial Statements and related Notes included in Item 1
hereof.
FUNDS FROM OPERATIONS: Most industry analysts consider FFO an appropriate
supplementary measure of operating performance of a REIT. In general, FFO
adjusts net income for non-cash charges such as depreciation, certain
amortization expenses and most non-recurring gains and losses. However, FFO does
not represent cash provided by operating activities in accordance with GAAP and
should not be considered an alternative to net income as an indication of the
results of the Company's performance or to cash flows as a measure of liquidity.
In 1995, the National Association of Real Estate Investment Trusts ("NAREIT")
established new guidelines clarifying its definition of FFO and requested that
REITs adopt this new definition beginning in 1996. The Company computes FFO in
accordance with the definition recommended by NAREIT.
For the 29-day period beginning June 2, 1998 and ending June 30, 1998, the
Company's FFO was the same as its reported net income of $756,697 or $0.146 per
share.
RESULTS OF OPERATIONS: Clarion began operations on June 2, 1998. Net income for
the 29-day period beginning June 2, 1998 and ending June 30, 1998 amounted to
$756,697 or $0.146 per share. Total income for the period was due primarily to
interest income from securities available for trade of $1,634,766, unrealized
gains on securities held for trade of $134,709 and a loss on the sale of
securities of $210,501. Total expense for the period was due primarily to
interest expense of $820,724 and management fees of $79,360.
The Company is currently in the process of acquiring its initial portfolio of
investments, so the results of operations, including the interest yields on
investments, realized during the period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for future periods.
CHANGES IN FINANCIAL CONDITION
GENERAL: From June 2, 1998 to June 30, 1998 total assets increased by $248.4
million. This increase was due primarily to a $224.3 million increase in
securities available for trade, $13.1 million increase in commercial mortgage
loans receivable and a $7.3 million increase in other investments. Total
liabilities increased by $151.9 million during the period, primarily due to a
$147.7 million increase in repurchase agreements payable. At June 30, 1998,
accrued
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expenses, payables and other liabilities of $1,851,235 were primarily
comprised of accrued interest payable and unpaid costs incurred in connection
with the organization and capitalization of the Company.
In accordance with the terms of the Management Agreement, an accrual of $79,360
in base management fees was made for the period June 2, 1998 to June 30, 1998.
Clarion did not accrue for, or pay, the Manager any incentive compensation for
the period June 2, 1998 to June 30, 1998.
STOCKHOLDERS' EQUITY: Stockholders' equity increased by $96.5 million from June
2, 1998 to June 30, 1998. The increase in stockholders' equity during this
period was attributable to retained earnings of $32,092, an increase in common
stock and additional paid-in capital of $98.1 million from the issuance of
5,000,000 shares of common stock in June 1998, and a decrease of $1.6 million
due to the repurchase of stock. See the Statement of Changes in Stockholders'
Equity in the Interim Financial Statements included in Item 1 hereof.
CAPITAL RESOURCES AND LIQUIDITY: Liquidity is a measurement of the Company's
ability to meet potential cash requirements, including ongoing commitments to
repay borrowings, fund investments, loan acquisition and lending activities and
for other general business purposes. The Company's primary sources of funds for
liquidity consist of repurchase agreements and maturities and principal payments
on securities and loans, and proceeds from sales thereof.
The Company's operating activities provided cash flows of $564,769 during the
period June 2, 1998 to June 30, 1998
The Company's investing activities used cash flows totaling $240.9 million
during the period June 2, 1998 to June 30, 1998. During the period, cash flows
from investing activities were used primarily to purchase securities - trading
and other investments.
The Company's financing activities provided $242.3 million during the period
June 2, 1998 to June 30, 1998 and consisted primarily of net proceeds from the
issuance of 5,000,750 shares of common stock and proceeds from repurchase
agreements.
As discussed above, the Company is engaged in due diligence with respect to a
variety of investments. In addition, the Company is engaged in discussions with
respect to obtaining various third-party borrowings. To the extent that either
of these two activities comes to fruition, the Company's liquidity and capital
resources could be materially affected.
NEW ACCOUNTING PRONOUNCEMENT: In June of 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133"). This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that the Company recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge of the exposure to
changes in the fair value of a recognized asset or liability or a hedge exposure
to variable cash flows of a forecasted transaction. The accounting for changes
in the fair value of a derivative (e.g. through earnings or outside earnings,
through comprehensive income) depends on the intended use of the derivative and
the resulting designation.
SFAS 133 is effective for all fiscal quarters beginning after June 15, 1999.
Company management is evaluating the impact that this statement will have on its
hedging strategies and use of derivative instruments and is currently unable to
predict the effect, if any, it will have on the Company's financial statements.
OTHER: The Company is currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance. The Company does not expect
that the cost to modify its information technology infrastructure to be Year
2000 compliant will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance. The
Company is currently evaluating the Year 2000 compliance of its suppliers and is
seeking written assurance from software vendors and suppliers that their systems
are Year 2000 compliant. In the event that any of the Company's significant
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's business operations could be adversely affected.
FORWARD-LOOKING STATEMENTS: Certain statements contained herein are not, and
certain statements contained in future filings by the Company with the SEC, in
the Company's press releases or in the Company's other public or shareholder
communications may not be, based on historical facts and are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements which are based on various assumptions (some
of which are beyond the Company's control), may be identified by reference to a
future period or periods, or by the use of forward-looking terminology, such as
"may," "will," "believe," "expect," "anticipate," "continue," or similar terms
or variations on those terms, or the negative of those terms. Actual results
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<PAGE>
could differ materially from those set forth in forward-looking statements due
to a variety of factors, including, but not limited to, those related to the
economic environment, particularly in the market areas in which the Company
operates, competitive products and pricing, fiscal and monetary policies of the
U.S. Government, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity. The Company does not undertake, and
specifically disclaims any obligation, to publicly release the result of any
revisions, which may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
At June 30, 1998 there were no pending legal proceedings to which the Company
was a party or of which any of its property was subject.
Item 2. Changes in Securities and Use of Proceeds
On May 28, 1998, the Company sold (1) 750,000 shares of Common Stock to Monroe
Investment Corp., a Maryland corporation, at a price of $20 per share of Common
Stock or $15,000,000 in the aggregate and (2) 250,000 shares in the aggregate of
Common Stock to Daniel Heflin and Clarion Partners, LLC, a New York limited
liability company, at a price of $20 per share of Common Stock or $5,000,000 in
the aggregate. The foregoing shares were sold without registration under the
Securities Act in reliance on one or more exemptions therefrom. Also on May 28,
1998, Clarion issued 175,000 shares of Class B common stock in exchange for a
10% interest in the Manager and an option to purchase the remaining 90% interest
(or all of the assets of) the Manager for 90% of fair market value. The option
may be exercised between January 2, 2000 and March 31, 2001 only with the
approval of the Independent Directors.
Use of Proceeds of Initial Public Offering:
<TABLE>
<S> <C>
Effective Date of the Company's Registration Statement: May 28, 1998.
Commission File Number 333-47887
Date the Offering Commenced May 28, 1998
Names of Managing Underwriters Bear Stearns & Co. Inc.,
Lehman Brothers,
CIBC Oppenheimer,
EVEREN Securities, Inc.
Class of Securities Registered Class A Common Stock
Amount Registered and Sold:
Amount registered 4,000,000 shares
Aggregate price of offering amount registered $80,000,000
Amount sold 4,000,000 shares
Aggregate offering price of amount sold $80,000,000
Expenses: The expenses incurred in connection with the Offering were as follows:
Underwriting Discounts and Commissions* $3,975,000
Finders Fees* $0
Expenses Paid to or for Underwriters** $0
Other Expenses** $1,442,000
Total Expenses** $5,417,000
</TABLE>
*Actual amount of expense
**Reasonable estimate for amount of expense
None of the expenses of the Offering consisted of direct or indirect payments to
(i) directors, officers, general partners of the Company or their associates,
(ii) persons owning 10 percent or more of any class of equity securities of the
Company, or (iii) affiliates of the Company.
<PAGE>
<PAGE>
Net Proceeds: The net offering proceeds to the Company from the Offering after
deducting the total expenses described above was $74.6 million. All of the net
proceeds of the Offering have been used to acquire the Company's investment
portfolio of commercial mortgage-backed securities (primarily subordinate
securities), commercial mortgage loans, mezzanine investments and other real
estate related investments.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Purchase & Sale Agreement between the Company and Monroe
Investment Corp.
Exhibit 10.2 - Purchase & Sale Agreement between the Company and Gramon Fund
(BVI), LP
Exhibit 10.3 - Form of 1998 Stock Incentive Plan (incorporated herein by
reference to the Exhibits to Amendment No. 3 to the Registrant's Registration
Statement No. 333-47887 on form S-11 filed on May 15, 1998)
Exhibit 10.4 - Form of Management Agreement (incorporated herein by reference to
the Exhibits to Amendment No. 3 to the Registrant's Registration Statement No.
333-47887 on form S-11 filed on May 15, 1998)
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
(1) The Company filed a Form 8-K on June 11, 1998, which contained a news
release announcing investment activity by the Company.
(2) The Company filed a Form 8-K on June 18, 1998, which contained a news
release announcing investment activity by the Company.
(3) The Company filed a Form 8-K on July 1, 1998 to clarify information
provided in its Form 8-K filed on June 15, 1998.
(4) The Company filed a Form 8-K on July 7, 1998 which contained a news
release regarding the initiation of a stock repurchase program.
SIGNATURES
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.
CLARION COMMERCIAL HOLDINGS, INC,
Dated: August 13, 1998 By: /s/ Daniel Heflin
____________________________________________
Name: Daniel Heflin
Title: President and Chief Executive Officer
<PAGE>
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), made as of
May 28, 1998, by and between CCHI LIMITED PARTNERSHIP, a Delaware limited
partnership having an address of 335 Madison Avenue, New York, New York
("Purchaser"), and MONROE INVESTMENT CORP., a Maryland corporation having an
address of 335 Madison Avenue, New York, New York ( "Seller").
W I T N E S S E T H :
WHEREAS, Seller is the owner of that certain first mortgage loan
secured by the OMNI Hotel in Newport News, Virginia (the "Mortgage Loan") and a
20% preferred limited partnership interest in the owner of the Allwood Brighton
Office Center in Clifton, Passaic, New Jersey (the "Mezzanine Investment"; and,
collectively with the Mortgage Loan, the "Initial Investments"), each as further
described on Schedule 1 and Schedule 2 hereof, respectively;
WHEREAS, Seller desires to sell, and Purchaser desires to purchase,
all of Seller's' right, title and interest in the Initial Investments.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1. Sale. On the Closing Date (as hereafter defined), Seller
agrees to sell, assign, and transfer to Purchaser, and Purchaser agrees to
purchase and accept from Seller, all of Seller's right, title and interest in
the Initial Investments, in accordance with the terms and conditions of this
Agreement.
SECTION 2. Price. The purchase price (the "Purchase Price") for the
Initial Investments shall be fair market value of the Investments determined as
of the Closing Date in accordance with Exhibit A attached hereto. On the Closing
Date, Purchaser shall pay to Seller the Purchase Price by wire transfer of
immediately available funds to an account or the accounts designated in writing
by Seller.
SECTION 3. Closing. (a) The consummation of the sale and purchase
contemplated in this Agreement (the "Closing") shall occur at 1:00 p.m. on the
date of the Closing of the initial public offering (the "IPO") of the Class A
common stock of Clarion Commercial Holdings, Inc. (the "Company"), the general
partner of Purchaser's general partner, at the offices of Shearman & Sterling,
599 Lexington Avenue, New York, New York 10022.
(b) At the Closing, upon receipt by Seller of the items set forth in
Section 3(c) hereof, Seller shall deliver to Purchaser the following:
(i) the documents listed on Schedule 1 attached hereto with
respect to the Mortgage Loan; and
(ii) the documents listed on Schedule 2 attached hereto with
respect to the Mezzanine Investment.
At the Closing Seller shall represent and warrant to Purchaser that it owns the
Initial Investments free and clear of any lien or encumbrance and has the legal
right to transfer the Initial Investments to Purchaser without the consent of
any third party.
(c) At the Closing, upon receipt by Purchaser of the items set forth
in Section 3(b) hereof, Purchaser shall deliver to Seller the Purchase Price in
the manner set forth in Section 2 hereof.
(d) All documents and funds to be delivered at the Closing shall be
deemed to have been delivered simultaneously and no delivery shall be effective
until all such documents, instruments and funds have been delivered.
<PAGE>
<PAGE>
SECTION 5. Conditions Precedent to Purchaser's Obligations.
Notwithstanding anything to the contrary contained herein, the purchase and sale
contemplated hereby shall be expressly conditioned upon:
(a) the closing of the IPO prior to July 1, 1998; and
(b) as to each Initial Investment, the Board of Directors of the
Company has approved the purchase of such Initial Investment
in accordance with the terms hereof.
In the event the Board of Directors of the Company fails to approve
the purchase by Purchaser of any Initial Investment, this Agreement shall remain
valid and binding with respect to each other Initial Investment.
SECTION 5. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if (a)
personally delivered with proof of delivery thereof (any notice or
communications so delivered being deemed to have been received at the time
delivered on a Business Day (as hereinafter defined)), (b) sent by United States
registered or certified mail, postage prepaid (any notice or communication so
sent being deemed to have been received two (2) Business Days after mailing in
the United States) or (c) sent by nationally recognized overnight courier (any
notice or communication so sent being deemed to have been received on the first
(1st) Business Day subsequent to the date sent), addressed to the respective
parties as follows:
if to Purchaser:
CCHI Limited Partnership
335 Madison Avenue
New York, New York 10017
Attention: Daniel Heflin
if to Seller:
Monroe Investment Corp.
c/o Clarion Capital, LLC
335 Madison Avenue
New York, New York 10017
Attention: Daniel Heflin
or to such other address or party as either party may have furnished to the
other in writing in accordance herewith, except that notices of change of
address or addresses shall only be effective upon receipt. A "Business Day"
means a day of the year on which banks are not required or authorized to close
in New York, New York.
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such state.
SECTION 7. Amendments, Etc. No amendment or waiver of any
provision of this Agreement shall in any event be effective unless the same
shall be in writing and designated by the parties.
SECTION 8. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement.
SECTION 9. No Assignment. Neither party hereto may assign its
respective rights and obligations hereunder, in whole or in part, without the
prior written consent of the other party hereto.
<PAGE>
<PAGE>
SECTION 10. Entire Contract. This Agreement together with the
Exhibits hereto, constitutes the entire agreement of the parties regarding the
subject matter of this Agreement and all prior or contemporaneous agreements,
understandings, representations and statements, oral or written are hereby
merged herein.
* * *
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
PURCHASER:
CCHI LIMITED PARTNERSHIP
By: CCHI General, Inc., general partner
By:_______________________________________________
Daniel Heflin
President
SELLER:
MONROE INVESTMENT CORP.
By:_______________________________________________
Daniel Heflin
President
<PAGE>
<PAGE>
SCHEDULE 1
MORTGAGE LOAN DOCUMENTS
1. The original Promissory Note, dated as of December 18, 1997,
from EECO, a Virginia general partnership in favor of CMBS
Opportunity Fund, LLC (predecessor to Seller), endorsed to
Purchaser.
2. An original or a copy of the Mortgage, dated as of December
18, 1997 and recorded in the Clerk's Office, Circuit Court,
Newport News, Virginia in Deed Book 1486, on December 19,
1997, from EECO, a Virginia general partnership in favor of
CMBS Opportunity Fund, LLC (predecessor to Seller), and an
assignment thereof to Purchaser in recordable form.
3. The original of any loan agreement, assignment of leases and
rents, guaranty, letters of credit, security agreement or any
other document, agreement as instrument executed in connection
with the Mortgage Loan, and any amendments thereto, and
assignments thereof in favor of Purchaser.
4. Filed copies of any UCC Financing Statements related to the
personal property securing the Mortgage Loan and assignment
thereof in favor of Purchaser.
5. Any surveys, insurance certificates, appraisals, environmental
reports, engineering reports, title policies or other such
documents maintained in Seller's files with respect to the
Mortgage Loan.
<PAGE>
<PAGE>
SCHEDULE 2
Mezzanine Investment Document
1. A certified copy of the partnership agreement of Allwood
Brighton Associates, L.P. (the "Partnership").
2. An assignment of Seller's 20% partnership interest in the
Partnership in favor of Purchaser.
3. Any other reports, appraisals, surveys or other such materials
relating to the property owned by the Partnership in Seller's
possession.
<PAGE>
<PAGE>
EXHIBIT A
PROCEDURES FOR DETERMINING THE PURCHASE PRICE
The portion of the Purchase Price attributable to Mortgage Loan will
be determined by an independent investment bank.
The portion of the Purchase Price attributable to the Mezzanine
Investment will equal the sum of the unpaid principal balance of such Mezzanine
Investment as of the Closing Date plus any accrued interest thereon and
associated, reasonable acquisition costs incurred by Seller.
<PAGE>
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), made as of
May 28, 1998, by and between CCHI LIMITED PARTNERSHIP, a Delaware limited
partnership having an address of 335 Madison Avenue, New York, New York
("Purchaser"), and GRAMON FUND (BVI), L.P. a British Virgin Islands limited
partnership having an address of 335 Madison Avenue, New York, New York (
"Seller").
W I T N E S S E T H :
WHEREAS, Seller is the owner of those portions of certain classes of
commercial mortgage backed securities described in the twelfth column of Table I
hereof (the "Initial Investments");
WHEREAS, Seller desires to sell, and Purchaser desires to purchase,
all of Seller's' right, title and interest in the Initial Investments.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1. Sale. On the Closing Date (as hereafter defined), Seller
agrees to sell, assign, and transfer to Purchaser, and Purchaser agrees to
purchase and accept from Seller, all of Seller's right, title and interest in
the Initial Investments, in accordance with the terms and conditions of this
Agreement.
SECTION 2. Price. The purchase price (the "Purchase Price") for the
Initial Investments shall be fair market value of the Investments determined as
of the Closing Date in accordance with Exhibit A attached hereto. On the Closing
Date, Purchaser shall pay to Seller the Purchase Price by wire transfer of
immediately available funds to an account or the accounts designated in writing
by Seller.
SECTION 3. Closing. (a) The consummation of the sale and purchase
contemplated in this Agreement (the "Closing") shall occur at 1:00 p.m. on the
date of the Closing of the initial public offering (the "IPO") of the Class A
common stock of Clarion Commercial Holdings, Inc. (the "Company"), the general
partner of Purchaser's general partner, at the offices of Shearman & Sterling,
599 Lexington Avenue, New York, New York 10022.
(b) At the Closing, upon receipt by Seller of the items set forth
in Section 3(c) hereof, Seller shall deliver to Purchaser assignments and other
such instruments appropriate to transfer all of Seller's right, title and
interest in the Initial Investments to Purchasers. At the Closing, Seller shall
represent and warrant to Purchaser that it owns the Initial Investments free and
clear of any lien or other encumbrance and has the legal right to transfer the
Initial Investments to Purchaser without the consent of any other party.
(c) At the Closing, upon receipt by Purchaser of the items set forth
in Section 3(b) hereof, Purchaser shall deliver to Seller the Purchase Price in
the manner set forth in Section 2 hereof.
(d) All documents and funds to be delivered at the Closing shall be
deemed to have been delivered simultaneously and no delivery shall be effective
until all such documents, instruments and funds have been delivered.
SECTION 5. Conditions Precedent to Purchaser's Obligations.
Notwithstanding anything to the contrary contained herein, the purchase and sale
contemplated hereby shall be expressly conditioned upon:
(a) the closing of the IPO prior to July 1, 1998; and
(b) as to each Initial Investment, the Board of Directors of the
Company has approved the purchase of such Initial Investment
in accordance with the terms hereof.
<PAGE>
<PAGE>
In the event the Board of Directors of the Company fails to approve
the purchase by Purchaser of any Initial Investment, this Agreement shall remain
valid and binding with respect to each other Initial Investment.
SECTION 5. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if (a)
personally delivered with proof of delivery thereof (any notice or
communications so delivered being deemed to have been received at the time
delivered on a Business Day (as hereinafter defined)), (b) sent by United States
registered or certified mail, postage prepaid (any notice or communication so
sent being deemed to have been received two (2) Business Days after mailing in
the United States) or (c) sent by nationally recognized overnight courier (any
notice or communication so sent being deemed to have been received on the first
(1st) Business Day subsequent to the date sent), addressed to the respective
parties as follows:
if to Purchaser:
CCHI Limited Partnership
335 Madison Avenue
New York, New York 10017
Attention: Daniel Heflin
if to Seller:
Gramon Fund (BVI), L.P.
c/o Clarion Capital, LLC
335 Madison Avenue
New York, New York 10017
Attention: Daniel Heflin
or to such other address or party as either party may have furnished to the
other in writing in accordance herewith, except that notices of change of
address or addresses shall only be effective upon receipt. A "Business Day"
means a day of the year on which banks are not required or authorized to close
in New York, New York.
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such state.
SECTION 7. Amendments, Etc. No amendment or waiver of any
provision of this Agreement shall in any event be effective unless the same
shall be in writing and designated by the parties.
SECTION 8. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement.
SECTION 9. No Assignment. Neither party hereto may assign its
respective rights and obligations hereunder, in whole or in part, without the
prior written consent of the other party hereto.
SECTION 10. Entire Contract. This Agreement together with the
Exhibits hereto, constitutes the entire agreement of the parties regarding the
subject matter of this Agreement and all prior or contemporaneous agreements,
understandings, representations and statements, oral or written are hereby
merged herein.
<PAGE>
<PAGE>
* * *
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
PURCHASER:
CCHI LIMITED PARTNERSHIP
By: CCHI General, Inc., general partner
By:_______________________________________________
Daniel Heflin
President
SELLER:
GRAMON FUND (BVI), L.P.
By: _________________________, a general partner
By:_______________________________________________
Daniel Heflin
President
<PAGE>
<PAGE>
EXHIBIT A
PROCEDURES FOR DETERMINING THE PURCHASE PRICE
The Purchase Price shall be based on a bid from an independent
investment bank for each Initial Investment plus one-half of the bid/offer
spread for similar securities.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-02-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,925,339
<SECURITIES> 244,660,231<F1>
<RECEIVABLES> 1,798,407
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 248,383,977
<CURRENT-LIABILITIES> 151,893,940
<BONDS> 0
<COMMON> 98,098,045
0
0
<OTHER-SE> (1,608,008)
<TOTAL-LIABILITY-AND-EQUITY> 248,383,977
<SALES> 0
<TOTAL-REVENUES> 1,677,076
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 99,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 820,724
<INCOME-PRETAX> 756,697
<INCOME-TAX> 0
<INCOME-CONTINUING> 756,697
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 756,697
<EPS-PRIMARY> .146
<EPS-DILUTED> .146
<FN>
<F1>Includes commercial mortgage loans receivable of $13,052,642 and $7,307,638
in other investments.
</FN>
</TABLE>
